by José M. Barrionuevo, Nikolaos Georgikopoulos, Emmanuel D. Hatzakis and Guillermo Nielsen
New York Times
November 6, 2012
After almost three years of failed economic programs, Greece is at its most critical period since the restoration of democracy in 1974. Greece’s economic programs have all failed because they have been based on unrealistic views of how financial markets actually work.
The four fundamental flaws of the Greek economic strategy pursued until now are as follows.
First, E.U. governments, the European Central Bank and the International Monetary Fund have assumed that the present European financial crisis is simply a liquidity crisis, and not a solvency crisis. In a liquidity crisis, all that countries under pressure need is temporary financing to continue making short-term debt payments. In fact, the European crisis is primarily a solvency crisis, meaning that countries in crisis are not only missing the liquidity to make their debt payments due today, but lack the growth to generate enough income to consistently pay for their obligations in the future. This turns the temporary financing into something permanent, as Greece’s unresolved crisis has shown.
Second, the Greek economic and financial programs have failed repeatedly because they have assumed that Greece’s debt would be sustainable in a distant future year, meaning that it’s assumed that the country’s debt would eventually become a roughly constant or declining proportion of Greece’s G.D.P., suggesting that sufficient income would be produced through economic growth to service Greece’s debt. The crucial mistake is assuming that Greece’s debt would be sustainable, or fully supported by the economy’s growth after many years, instead of immediately, which is precisely what financial markets need to see to be confident that the crisis is finally being firmly resolved.
By not making the entire sovereign Greek debt sustainable from Day 1, even the partial, privately held Greek debt restructuring that occurred early this year failed to ensure that Greece’s economy could now service all of its remaining sovereign debt.