Would a 2010 default have been the best outcome for both Greece and the Eurozone?
Whilst the focus of attention is currently on Greece acquiescing to the demands from the Troika there remain quite fundamental issues about the long-term sustainability of the single currency and the frameworks in place. Ironically, these concerns have come about in part due to the stance adopted by the European Union. In retrospect, always an easy thing to call upon, it can be argued that the worst mistake made during this entire process was the 2010 debt re-structuring. This resulted in individual EU member states, together with the ECB and IMF, taking on much of the debt and effectively bailing out the banks who had lent the money in the first place. This was driven by fears from the EU and ECB about how credibility in the Euro would be affected by a Greek default and concerns of contagion across the Eurozone.
However, Greece may have actually been better off with the crisis coming to a head back in 2010. As a number of commentators have noted it is possible that private sector creditors would have been far more willing to accept re-negotiations of their exposure. It isn’t as though this is the first instance of sovereign default. Global financial institutions have had plenty of experience of that over the last thirty years. Banks at least have some modicum of understanding when it comes to risk. It is highly unlikely that private sector creditors would have taken the stance of expecting every cent to be repaid, yet that is effectively what at least some EU states are looking for. There are numerous “what ifs” that would have followed from a different decision in 2010. However, even if one assumes that Syriza had still come to power in January this year would they have adopted the same negotiating stance with private sector creditors as with Germany and the Troika? Would voters in the rest of the EU have had that much sympathy with banks over them taking a hit on Greek sovereign debt back in 2010?
The single currency has always been a politically driven concept. Indeed there are plenty of examples where politics has trumped economics, none more so than the adjustments made in the entry criteria required back in the late nineties. With politicians dominating the conversation it is inevitable that political considerations are to the fore. However, by shifting the Greek debt to the public sector the EU made this more than ever a political issue. It is now tax payers in the rest of the Eurozone who would directly suffer if the money was not repaid. The political consequences of that have naturally contributed to and influenced the stance adopted by EU governments.
Ironically, concerns over the long-term viability of the single currency are more prevalent today than five years ago. We now have a situation where the genie is out of the bottle. Ever since the single currency was launched the institutions at its heart referred to membership as being permanent. However, the talk of a Grexit has called into question that fundamental premise by those very same institutions. Back in the late nineties when the single currency was introduced there was a lot of talk that we would see the creation of a European municipal bond market with individual Eurozone states being the equivalent of U.S. municipalities. However, there is a marked difference. Whilst there remains talk of a Greek exit from the Euro, Detroit wasn’t thrown out of the Dollar or the USA when the city defaulted in 2013. Nor was New York City back in the seventies. Famously captured by the Daily News in their “Ford to City: Drop Dead” headline the U.S. Federal Government responded quite differently to both New York and Detroit’s defaults than the EU did in 2010. Once the dust has settled Europe needs to sit back and fundamentally consider how the debt of individual government’s within the Eurozone should be viewed and treated. Moral hazard issues have been created through the bailout, just as there were with the “too big to fail” premise during the financial crisis. The irony here is that it may have been better for Greece and for the long-term sustainability of the Eurozone had a Greek default been allowed in 2010.