So the great Greek drama is reaching the end. At least it might be the end – on second thoughts, rather like a compelling Netflix, ITV or ARD serial, maybe it will be extended to more seasons, even when it really shouldn’t.
What conclusions are we to draw? Three:-
1) It’s been a good crisis for stereotypes. The Germans have supported theirs well with their plain-spoken firmness of economic principle, and an appearance of stubbornness and solidity of character. The Greeks have too: they’ve been shifty, unreliable negotiators, and definitely not the sort of people one feels like lending more money to and expecting to sleep well during the term of the loan. Even the British have upheld theirs: opining in a grandiloquent way on a matter that they have no involvement in, as if it’s the nineteenth century and they rule most of the world. And as for the Americans, their comments have often suggested less comprehension of the issues than their global power would reasonably correspond to – spot on with the cliché. Again true to image, the Greeks seem more fun than the Germans: would you rather have a Friday night evening of wine on Varoufakis’s famous terrace with him (with or without his glamorous partner) or one with Mutti Merkel (as Germans affectionately call her)? It is very politically incorrect in the twenty-first century to use or defend stereotypes, but the Greek saga shows their usefulness. Stereotypes, after all, exist in the first place because enough people over time have noticed traits that are often exhibited by certain kinds, groups, or nationalities of people. It would be most unfair to pre-judge an individual based on which group he or she is from (herein lies a massive problem, because so many people do just that), but the generalisation and therefore stereotype about the group doesn’t seem all that unreasonable. It shouldn’t be relied upon as cast iron predictor, but nor should it be consigned to the rubbish tip as amoral fiction.
2) Too much of the media has bought the Greek dupe that a default by Greece will imperil the whole European Union. What nonsense, is the view from here. Greece, with $238bn or so in 2014, accounts for less than 2% of eurozone GDP, and cannot be said to be of central importance in any way economically, apart from the fact it owes a lot of money to others. But its public sector debt of 177% of GDP or €317bn (year-end 2014, Eurostat), if it is not repaid, is not going to break Europe, European banks, the IMF, ECB, or anyone else. A hole of €317bn, should it not be absorbed successfully by all creditors, at the end of the day simply amounts to less than six additional months of Mario Draghi’s QE programme. Lehman Brothers’ and AIG’s defaults were each far more important to shattering confidence in the global financial system: these were systemically important institutions operating at the heart of this system.
To the contrary, the real threat to EU integrity would be a cave-in by the Eurogroup to Greece. This could critically weaken Spain’s, Portugal’s, Italy’s, and even France’s reform-mindedness, leading to markets brutally retesting these economies, with highly uncertain results.
3) If the Greeks are not serious enough about root-and-branch economic reform, cut them off from any further policy maker loans. This will quickly lead to default, but MM still wonders whether this immediately and inevitably leads to Greece’s exit from the common currency, as is universally taken as fact in the media to date. Is it not conceivable, via the ECB exercising its recently-granted role of eurozone banking regulator, for it to bring the insolvent Greek banks under its administration and arrange for their recapitalisation under new ownership? There wouldn’t be much of a Greek-owned banking system left, but so what?
Isn’t this a cruel approach? Well ostensibly yes, but in practice no – actually it is the best solution for both Greece and Europe. A Greek default would shut it out of the international capital markets for at least a couple of years, or until it demonstrated a newly rigorous approach to managing its public sector, whichever was longer. This period of being shut out would necessitate running a consistently balanced state budget – which would itself amount to rigour, but a self-imposed and unavoidable one. This would be painful, but Greece would be putting itself onto a sustainable economic path, helping its chances for long term economic growth. To sum it up, if the eurozone doesn’t say it to Greece first, Alexis Tsipras should this week tell Merkel and Draghi: “We hereby opt to default on our debts, and stand on our own two feet by running a balanced budget, with neither the burden of any interest payments nor the recourse to any further debt financing. We also hereby give notice that we will in no way obstruct the ECB from exercising its mandate to oversee the winding up and recapitalisation under any new ownership of Greek banks. We will retain our use of the euro.” Greece would lose its domestically owned banking system (or most of it), but it would be replaced by a foreign owned one: who has any proof that this is bad in any way for Greece’s economic future? To the contrary, most likely.
Postscript: How can this be related to Vietnam?
At less than 50% of GDP, Vietnam’s external debt to GDP is far from Greece’s 177%. However, Vietnam’s debt ratios have been rising in recent years, both its external and its government one. The latter – which counts government debt to both internal and external creditors – will be around 64% of GDP by year-end 2015, when including government-guaranteed debt. There is also an only sporadically reported additional amount of state owned enterprise debt, which might bring the total public sector figure to as much as 100% of GDP. This latter figure is higher but not so different to that of the US, France, or the UK.
Regarding the external debt, the majority of it is in the form of policy loans by the World Bank, Asian Development Bank, and the government of Japan, with highly concessional rates of interest. Vietnam’s policy lenders are softer and more generous than is the case for Greece with the eurozone and the IMF.
As we have seen with Greece, easy debt can lead to bad debtor behaviour. This risk of course applies to Vietnam too, but perhaps in Vietnam’s case there is the advantage of (a) being East Asian and not southern European, and therefore benefiting from (the stereotype of !) a better work ethic and a greater inherent seriousness about achieving sustainable economic growth; and (b) the knowledge that a default by Vietnam would lead to creditor intrusion and/or public revolt, thereby posing a vital threat to the one party state.
Vietnam needs improvement in its management of public finances, but the good news is that (a) things are not at a level that is yet out of hand; and (b) there appears to be a relatively keen internal appreciation of the situation and a desire among a wide range of policy makers to improve it.