Friday, September 28, 2012

Europe needs to look at sharing more of Greece’s pain

by Mohamed El-Erian

Financial Times
September 28, 2012

If you want to cause major discomfort at a meeting of European policymakers, just try mentioning “OSI”, or official sector involvement. The notion that official creditors, and by that I mean governments and regional/multilateral institutions, may need to accept a reduction in their contractual claims on Greece is anathema to many. Yet the issue will surface repeatedly, and more frequently, given the current overly-constrained approach to solving Greece’s deep problems.

Official creditors have good reasons to resist OSI. Their sizeable lending to Greece was not a commercially-based decision but rather an emergency intervention. The aim was both to stabilise Greece and to limit destabilising spillover for other European economies.

They came in at a time when private creditors were exiting Greece en masse, and in a highly disorderly fashion. Their financing was extended at concessional interest rates. Loan maturities extended well beyond what a private creditor would envisage. And, when push came to shove, the official sector provided even more funding to Greece so that the country could meet its debt-servicing obligations.

None of this would have occurred if the official sector did not think of itself as a “preferred creditor”. That is what a lender of last resort reasonably expects, especially when it is stepping in to counter a disorderly financing implosion (and thus limit the losses to be incurred by private creditors). And it is what many parliaments in creditor countries believe as they encumber domestic tax receipts with actual or contingent Greek liabilities.


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