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The timing seems almost fitting. Precisely one year after the Greek bailout in early May 2010, an action intended to help Greece but also to keep the euro area intact, international media celebrated the anniversary with headlines once again proclaiming Greece's departure from the euro area1. Fortunately, however, an unscheduled and not so secret meeting of the most important euro area member states' finance ministers in the first week of May was representative of the progress made in the last year – and of how much remains to be done.
Greece will not be able to raise up to €30 billion from private investors in longer-term debt in 2012, as it is supposed to according to the original IMF program. That a select group of euro area finance ministers met to discuss this fact was encouraging. They were effectively acknowledging at the highest political level in Europe —and at the European Central Bank (ECB)— that the current trajectory of Greece's finances is not sustainable. Rather than face another late-night drama of last minute ad hoc decisions as they did in May 2010, the euro area financial markets are likely to see a prolonged negotiation ahead of crunch time in 2012, focused on the required changes needed for the original IMF program. A more sensible timetable for some politically painful decisions represents a newfound and welcome degree of realism among euro area policymakers.
Without access to financial markets in 2012 and with the euro area – understandably – unwilling to contemplate a sovereign default, there is no doubt that Greece in 2012 will get access to more money from the other euro area members in a year. The only question is what the conditions for this will be. It is therefore encouraging that the euro area finance ministers seem to be contemplating a renegotiation of the entire Greek program to reflect the progress and setbacks since May 2010.
It is not unusual for IMF programs to be periodically reviewed, updated and renegotiated "mid-process." Accordingly, a renegotiated program with Greece does not reflect a failure of the bailout process, provided that the political will to continue the process remains in place. Given the catastrophic costs of a Greek sovereign default for both Greece and the euro area, the political will to do the right thing will not be lacking in the euro area. But, apart from extending more taxpayers' aid to Greece, what will a renegotiated IMF program look like?
First, in a line seen also in the recent Portuguese bailout program2, it seems as if the "fallacy of expansionary fiscal contractions" — i.e. the notion that governments can cut spending dramatically without serious adverse growth, unemployment and tax revenue implications —is slowly being corrected inside the euro area.3. Greece is therefore unlikely to be asked for significantly additional austerity in years ahead.
Instead, Greece is certain to be asked to accelerate its privatization program as a way of changing its balance sheet. This is an appropriate focus. An ambitious privatization program in Greece would do more than bring in additional government revenue. Very large productivity improvements will follow from privatizing previously mismanaged public assets, particularly in many publicly owned utilities and infrastructure services. On the other hand, such restructuring will likely provoke protests by militant Greek labor unions in the utility sector, and some of these could be violent.
In reality, the euro area will likely ask the Greek government to replicate the battle waged by Prime Minister Margaret Thatcher of Britain against Arthur Scargill's UK National Union of Mineworkers (NUM) in 1984-85. A major confrontation is needed to break the coercive political power of Greek unions and improve the overall business environment. Only through privatization, however, can the Greek government raise the revenue from the sale of real estate and other assets to private domestic and foreign investors. Some Europeans joke that it would be easier for Greece to sell some of its islands to foreign interests. But if you think of even that light-hearted proposal in another way, private investors won't invest even in Greek islands unless they are guaranteed access to efficient and reliable power, gas and telecommunications services.
Euro area politicians will need some "political cover" to give Greece more public money, no matter what. To provide that, there seems likely to be a limited and strictly "voluntary" private sector participation in the process. The character of this participation will likely be determined only after the results of the EU bank stress tests are made public in June, clarifying the ability of the banks to cope with loan losses in the face of Greece's problems. However, it does not seem likely that the "voluntary" private sector participation will be big enough to make a difference to the sustainability of Greek debt. Such "voluntary" participation will thus likely serve as a symbol to assuage taxpayers that they are not the only ones extending help. Only a relatively small number of relatively healthy euro area banks will probably be tapped by their governments and the ECB to "contribute" in the form of some kind of writedown of the net present value (NPV) of their holdings of Greek government debt.
The drawn out muddling through the euro area crisis thus continues -- but without the dismal and disastrous fate of an outright legal default.
Notes
1. http://www.spiegel.de/international/europe/0,1518,761201,00.html.
2. http://www.imf.org/external/np/sec/pr/2011/pr11160.htm.
3. Assuming that there will be no growth and unemployment effects of severe fiscal austerity is obviously an appealing idea for politicians and central bankers trying to politically sell austerity programs to skeptical publics. It is however erroneous. See for instance http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf.
