Thursday, June 30, 2011

Greece can be saved – here’s how to do it

by Jeffrey Sachs

Financial Times

June 30, 2011

Greece avoided an imminent default by taking a brave vote for more fiscal austerity on Wednesday. Europe and the International Monetary Fund will now release short-term financing to enable Greece to service its debts at least through the summer. Yet there can be no doubt that this second bail-out, which follows a similar short-term package in March 2010, must be the last of its kind. Either Greece with its eurozone partners will agree on a long-term solution, or the rioters in the streets of Athens will prevail the next time that the Greek political system is pushed to the financial brink.

The stalwart Greek people deserve our gratitude for this week’s vote. A default could have led to a dramatic unravelling of the European economy, and even beyond. Many of my colleagues in academia have blithely called upon Greece to default, and thereby force an involuntary restructuring of its debts. I find such advice to be naive. Nobody can guarantee a managed default in today’s global financial system. Bank runs, a contagion to other countries, the triggering of credit default swaps, legal actions by vulture funds that buy up cheap Greek bonds and then sue for full repayments, and heated political recriminations within Europe, are but some of the consequences that could quickly follow a default. An unravelling of the monetary union could not be excluded.

A default may indeed eventually occur, but should never be a first or early resort. I say this not because of the sanctity of sovereign debt contracts, but out of pragmatism. I myself have helped to negotiate a number of sovereign debt restructurings, from Bolivia to Poland to Nigeria and beyond. But Greece is different. It is a developed economy. It has not collapsed into hyperinflation. It has not emerged from externally imposed communism, as in Poland two decades ago. Greece over-borrowed and overspent, then got caught in accounting shenanigans as well as the global financial meltdown in 2008. Now Greece needs to adjust, if that adjustment is within reason and decency rather than the kind that would kill the economy.


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