Don’t Worry About Greece

The latest round of fretting in global debt markets is focused on Greece (WSJ; Greece).  This is misplaced.

To be sure, there will be a great deal of shouting before the matter is formally resolved, but the Abu Dhabi-Dubai affair shows you just where Greece is heading.

The global funding environment (thanks to Mr. Bernanke, Time’s Person of the Year) will remain easy for the foreseeable future.  This makes it very easy and appealing for a deep pocketed friend and ally (Abu Dhabi; the eurozone) to provide a financial lifeline as appropriate (a loan; continued access to the “repo window” at the European Central Bank, ECB).

Of course, there will be some conditions – and in this regard the Europeans have a big advantage: the Germans.

Everyone knows the German authorities are tough and hate bailouts (aside: except for their own undercapitalized banks).  And the Germans can punish the Greeks with hostile bluster that the bond markets will take seriously – further pushing up Greek bond yields and credit default swap (CDS) spreads.

But, in reality, there are many voices at the ECB table and most of them are inclined to give Greece a deal – put in place a plausible “medium-term framework” and we’ll let your banks roll over their borrowing at the ECB, even if Greek government debt (i.e., their collateral) is downgraded below the supposedly minimum level.

So Greece has a carrot and a stick – and refinancing its debt is so cheap in today’s Bernanke-world, they will not miss the opportunity. 

Greece has become a quasi-sovereign, in the sense that it issues debt not in its own currency.  But it still has control over its own cash flow.  And most budget math is based on perceptions of plausible baselines that are – in case you didn’t already know – more about political perceptions (in this case, within the ECB governing council and perhaps EcoFin) than likely economic futures.

The important development is the role of the European Central Bank.  It is becoming a de facto International Monetary Fund (IMF), but just for the eurozone (or is that the European Union?).  It will lend a troubled country money, but only if the government does some of the hard fiscal work.  The IMF may have a role to play in budget advice and assessment for Greece, but it may also be squeezed out of a meaningful policy role.

This is good, in the sense that there is no stigma attached to having your banks borrow from the ECB.  When random bad shocks hit, it’s good to have a safety net that countries are willing to use. 

But this is also less good, in the sense that as the global economy moves back towards boom times, putting more bailout mechanisms in place and removing even further the downside risks for creditors is – in the broadest possible terms – asking for trouble.  Why worry about whether borrowers can repay if there is a deep-pocketed sovereign (run by a cousin, neighbor, or committed friend) who will, when push comes to shove, protect all creditors?

By Simon Johnson

14 responses to “Don’t Worry About Greece

  1. “This is good, in the sense that there is no stigma attached to having your banks borrow from the ECB.”

    Maybe I’ve been thinking of Europe as more centralized than investors do, but it never occurred to me that people might stigmatize money going from the ECB to Greece anymore than they would money going from the FED to California.

  2. Andra moi ennepe, Priapos, polytropon, hos mala polla
    plangchthe, epei Troies ieron ptoliethron eperse.
    pollon d’anthropon iden astea kai noon egno
    polla d’ho g’en ponto pathen algea hon kata thumon
    arnumenos en te psychen kai noston hetairon

  3. Simon, I am really surprised by your optimistic tone; I can´t help but hear the FED chairman´s ¨It´s all contained; only $ 50 billion write-downs¨.

    As the problems were never contained, nor limited to subprime housing, EU´s problems are neither contained (globalization), nor limited to Greece.

    ¨Everyone knows the German authorities are tough and hate bailouts¨

    Dass war einmal…..

    ¨This is good, in the sense that there is no stigma attached to having your banks borrow from the ECB.¨

    If a borrower has no valuable collateral, nor the ability to pay back the loan, then there should be a stigma! The Irish people will quit accepting pay-cuts and tax increases as soon as they see Greece will be bailed-out. So after Greece and Ireland, it will be Italy, Spain, and Portugal for sure. Oh and then perhaps also Austria.

    ¨But this is also less good¨
    Is that an understatement?
    What would be the result of continued QE² (= QE square, quantitative easing and qualitative easing)?

  4. CBS from the West

    Translation, please?

  5. Those are the first few lines of Homer’s Odyssey in the original Greek (well, Grenglish). I cannot believe that the requirement of my high school Greek class to memorize these lines has finally become useful. Kudos to the great Doc Knittle.

  6. remember what I said about about human interest stories???? why didn’t you take note of that????? ahhhhhhaaaaaaaaaaaaa!!! you got it now???

  7. I tend to be less sanguine about Greece because fudging accounts should not be acceptable if financial crisis teach anything. There is also a certain degree of moral hazard in ECB refinancing at low rates and accepting low level collateral.

    Lies, damned lies and statistics: or governments’ Ponzi scheme at
    http://mgiannini.blogspot.com/2009/12/lies-damned-lies-and-statistics-or.html

  8. Uncle Billy seems to have a Sex inclined mind
    like Big Billy….had a couple of years ago

  9. Like who doesn’t? Sex-inclined pen.

  10. the correct is Mousa and not Priapos (would like to be)

  11. Sigh. Priapos…Johnson…

    Ok, back to our regularly scheduled pretend outrage.

  12. Herr Jean Claude Trichet, EZB-Präsident, ist kein Deutsch, aber Franzosich… True, the French are as mean as the Germans…

  13. TELL ME, O MUSE, of that ingenious hero who travelled far and wide after he had sacked the famous town of Troy. Many cities did he visit, and many were the nations with whose manners and customs he was acquainted; moreover he suffered much by sea while trying to save his own life and bring his men safely home; but do what he might he could not save his men, for they perished through their own sheer folly in eating the cattle of the Sun-god Hyperion; so the god prevented them from ever reaching home. Tell me, too, about all these things, O daughter of Jove, from whatsoever source you may know them.

    the translantion of the Homer anglicanised verses
    i hope that this might be helpful