July 16, 2015 – Yesterday, SKY TG 24 aired an interview with SEP Senior Fellow Lorenzo Bini Smaghi, in which he discusses the Greek bailout plan, debt relief, and bank recapitalization.
Sky[05:38] : What do you think about the new IMF report indicating the necessity for debt relief, which contains new estimates for debt repayment?
Obviously, as we all know, the economic situation in Greece over the past few weeks, after all the bank closures, has significantly worsened. Clearly, the Greek debt needs to be restructured. But how? Here, the IMF is being a bit cunning, in the sense that everyone else’s debt needs to be restructured, since their own can’t be.
There are many ways to restructure debt. One is to directly cut the amount owed, but the problem with this method is that it will show up in the public budget of European countries as a loss. The other method is to extend the due dates on loans, which have been deferred before and can be pushed back again. It is also possible to make it such that Greece doesn’t have to pay interest for the next thirty years, which is an accounting trick to basically reduce the debt without having to put it on the books. The chosen path will depend on estimates of economic growth, but the third option is to both push back the due date and charge no interest, which might be the best solution.
Sky [12:46]: When do you think Greek banks might reopen?
The ECB has already stated that there is a plan for emergency bridge financing to recapitalize banks. Returning to the previously raised issue of growth estimates, I think it is difficult because no one knows what will happen. In my opinion, the problem lies in whether Greece will implement reforms. There needs to be an agreement between Athens and its creditors that this is the right path, which would be a fundamental change for Tsipras.
Sky [14:13]: But what about the argument that Greece has had the Troika in its house for five years, and their economy hasn’t improved.
If the Greeks go through with reforms, it should be for Greece, and not for the Troika. The problem is, as we know is the case in our own house, reforms are voted through parliament, and then they need to be implemented. There is an administrative aspect, and what has happened in the past in Greece is that the reforms have never gone beyond parliament.
Tsipras has made it clear that he doesn’t believe in this plan, but he wants parliament to pass it anyway. This attitude is very similar to what has happened in past years. They legislate austerity, but when it comes to the job market or property rights, it isn’t enough to vote it through parliament. The changes need to be implemented—even in our own house, this doesn’t happen.
Sky [20:52]: €50bn is a lot for an economy the size of Greece…
Well, this is a collateral fund. No one is selling off these assets, they are simply used as a guarantee. At this point, Greece is a country surviving on assistance. Any money transferred to Greece will probably not be repaid, and it is therefore conditional on a very clear change in policy. Other countries have done this—Portugal, Ireland, and Cyprus—and the plan is based on an idea of how to manage the economy. Tsipras is known for having a completely different mentality in this regard, and he has come out to say that he doesn’t believe in this adjustment program or these reforms. Therefore, it’s hard to believe he’ll implement them.
Sky [22:25]: So why doesn’t Greece just leave the euro?
Leaving the euro, for a country like Greece, will lead to a decrease in GDP of around 10%. Their main exports are services, which are paid in euros, so leaving wouldn’t solve their problem. The main problem in Greece is a failure of public administration. The proportion of people that work for the public sector, or who depend on the pension system, is too high. Therefore, if they leave the euro, they would probably experience hyperinflation. Greece isn’t stupid.
I think the only way that Greece will implement reforms is if Europe forces it to. If Tsipras makes a firm commitment to the outside world, he might get the European partners to believe in him, and then I think there might be hope.
Sky [23:28]: What do you think of the criticism that economies choked by austerity can’t grow—our country, for example?
Remember that, in our case, much of the public debt is actually in the hands of Italians. We will have to be careful when talking about Italian debt, and to realize that many of the creditors are actually Italian citizens. Italy needs to grow, and again, the only way to do this is through reforms.
To be part of a monetary union, it is necessary to carry out certain tasks. It is not a paradise. We have to be competitive, and the responsibility for public financing remains in the hands of each member state. Therefore, if we find ourselves in a bind, it is our own problem. This concept is something that certain other countries don’t seem to understand.
- The full interview (in Italian) is available from SKY TG 24.