Ashoka Mody writes: President Barack Obama’s recent call to ease the austerity imposed on Greece is remarkable – and not only for his endorsement of the newly elected Greek government’s negotiating position in the face of its official creditors. Obama’s comments represent a break with the long-standing tradition of official American silence on European monetary affairs. (Note: It is unfortunate that the American who speaks up knows so little of his own country’s finances).
German Chancellor Angela Merkel said that Greece should not expect more debt relief and must maintain austerity. Meanwhile, after days of not-so-veiled threats, the European Central Bank is on the verge of cutting funding to Greek banks. The guardians of financial stability are amplifying a destabilizing bank run.
The International Monetary Fund has acquiesced in German-imposed orthodoxy. As IMF Managing Director Christine Lagarde told the Irish Times: “A debt is a debt, and it is a contract. Defaulting, restructuring, changing the terms has consequences.”
Delays and errors in managing the Greek crisis started early. In July 2010, Lagarde, who was France’s finance minister at the time, recognized the damage incurred by those initial delays. Even the IMF acknowledged that it had been a mistake not to impose losses on private creditors preemptively; it finally did so only in June 2013, when the damage had already been done.
There is plenty of blame to go around. Former US Treasury Secretary Timothy Geithner championed a hardline stance against debt restructuring during a crisis.
Lee Buchheit, a leading sovereign-debt attorney was harshly critical of the authorities’ failure to face up to reality.
Obama may have arrived late to the right conclusion, but he expressed what should be an obvious truth: “You cannot keep on squeezing countries that are in the midst of depression.”
Recent analysis shows that forgiveness of Greece’s official debt is unambiguously desirable.. If European sensitivities must be assuaged, Greece’s debt repayment could be drawn out over 100 years.
At the end of the day, debt forgiveness benefits creditors as much as it helps debtors. Creditors have known this since Spain’s King Philip II became the world’s first known serial sovereign defaulter.
European authorities must come to understand that the next act of the Greek tragedy will not be confined to Greece. If relief fails to materialize, political discontent will spread, extremist forces will gain strength, and the survival of the European Union itself could be endangered.
