July 17, 2015 – Yesterday, SKY TG 4 aired an interview with SEP Director Marcello Messori, in which he discusses the sustainability of Greek debt. Below is a rough translation.
Sky [07:30]: We’ve witnessed quite a few protests since the accord was reached. Do you see a good solution for this problem?
M. Messori: First of all, I agree that we had arrived at a point where the solution could not have been anything but a political one. There was no longer any potential for a technical solution. Finding a last-minute political solution was good news. Now, we have to return to the details, so that we can relaunch everything that we have been talking about—improving the prospect of economic growth in Europe, particularly in the more economically fragile countries, and therefore, above all, in Greece.
From a certain point of view, while the reforms were not an obstacle in the short-term, they are not sufficient. We have to hope that the plan to finance Greece, and the money that will be provided by European institutions through this process, after surmounting all the obstacles in its way, will be able to not only allow for a return to normalcy on the part of the financial sector, which is a necessary component of everyday life in Greece, but will also open the way for investments that will strengthen the very structure of the Greek economy.
Sky [12:30]: Assuming that the money will arrive in mid-August—what happens if they need a loan next Monday?
M. Messori: They need bridge financing, and it is possible to use mechanisms that the EU had recently used to rescue states in the past. It’s necessary for Greece to be able to make its payment to the European Central Bank, because, from a technical standpoint, this allows the ECB to continue to furnish Emergency Liquidity Assistance (ELA) to the banking sector. This would be a temporary solution.
Sky [13:10]: And by bridge financing, you mean….
M. Messori: It’s a source of temporary liquidity, after which there will be another, more structured, bridge loan, which will stay in place until the more permanent solution, which we call the European Stability Mechanism, can go into effect and, in phases, release around €85bn into the Greek economy.
Sky [17:30]: So, whenever the money arrives, part of it must go toward paying the interest on past loans. For a regular citizen, it means that the amount of money they receive keeps decreasing. How does one escape this situation of a cat chasing its own tail?
M. Messori: Well, now we raise the problem of the sustainability of Greek public debt, which has gotten worse in recent days. I would like to underline the fact that every time Greece’s debt has been restructured, its financing obligations have been significantly reduced. For example, even though the size of Greece’s debt is much larger, relative to GDP, than Italy’s, their financing obligations are actually lower than that of our country. This is because they have been able to benefit from debt restructuring.
Therefore, the unsustainability of Greek public debt is due more to the fact that it has experienced weak growth in the past three quarters, and is currently experiencing a recession, than onerous interest payments. The challenge is to make this debt sustainable once more, which means, in the medium term, to return Greece to a state of equilibrium with respect to its balance of payments, and then to return it to a state of growth once more. This is one challenge.
The other challenge is to rebuild trust between Greece and other European states, and this trust can be built through homogenization of European institutions. Homogenization means that each economy does not subsist only on the markets, or only through interventions of individual member states, but also through European institutions that can help smooth relations between businesses and the job market, and other markets as well.
There is also the issue of relations between European institutions and the institutions of individual member states. If we cannot revive the trust between them, we risk not having the potential for economic growth. We also will not be able to sow the seed of solidarity, one defined by reciprocal guarantees and assurances.
- The full interview (in Italian) is available from SKY TG 4.