The political leadership of Greece is trying to convince Europe it can rescue the Hellenic Republic from its debt crisis without spending a dime.
Deputy Finance Minister Philippos Sachinidis said today that Greece is not asking Europe’s wealthier countries for any money now. Instead, he just wants Germany and France to send a message to markets that would bring down the Greece’s borrowing costs.
It’s easy to understand why Greece desperately wants to reduce its borrowing costs. In its last round of refinancing maturing debt, Greece discovered it had to pay almost twice as much as Germany to refinance its maturing debt. If Greece has to continue to borrow at these elevated rates, it will wind up paying as much as 12 per cent of its GDP to foreign bond holders. It’s far from clear that any government on earth could withstand that level of transfer of wealth out of the country.
Simon Johnson has pointed out that “German reparation payments were 2.4 per cent of gross national product from 1925 to 1932, and in the years immediately after 1982 the net transfer of resources from Latin America was 3.5 per cent of GDP (a fifth of its export earnings). Neither of these were good experiences.” What’s more, the rates Greece paid in the last round of refinancing seem cheap for the country with the highest debt to GDP ratio in the world. It’s quite likely that those rates were available because investors were already pricing in a good chance of a euro zone rescue.
This creates a difficult situation for Greece. It has to refinance tens of billions of euros of debt this year. At each round of bond issuances it needs to reassure buyers that the next round will be successful. You don’t want to buy Greek sovereign debt in April if there’s too high of risk of default when Greece comes back to the market in May.
But Greece’s plan is one that should leave anyone tempted to adopt it very wary. He wants the euro zone countries to set up a pool of funds that could be borrowed by any euro zone country whose rates went too high. The hope is that such a fund wouldn’t have to be tapped at all because its very existence would assure investors that Greece wouldn’t face a refinancing crisis when it next comes to market. The hope is that the fund alone will create a confidence in Greek stability.
This might sound familiar to anyone who remembers the financial debacle of Fannie Mae and Freddie Mac. Early in the summer of 2008, then Treasury Secretary Hank Paulson urged Congress to authorise him to explicitly back the debt of Fannie and Freddie. The theory was the same as the Greek plan: if the market were confident the mortgage giants had a federal backstop, they would be able to raise debt cheaply enough to survive their financial troubles.
“If you have a squirt gun in your pocket you may have to take it out. If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out,” Paulson said.
We all know how that ended. Paulson was forced to take out the bazooka by the end of August. The bill for rescue of Fannie Mae alone has already amounted to over $75 billion. Together the bailouts of the two companies now cost more than the $100 billion economists estimate home buyers ever saved due to lower mortgage rates subsidized by Fannie and Freddie On Christmas Eve 2009, the Obama administration removed a $200 billion aid limit on each company, extending unlimited backing through 2012.
Greek’s continue to blame the reluctance of their euro zone comrades to provide a bailout fund on a lack of “political will.” But what is really lacking is a willingness on the part of ordinary Germans and French to suspend their disbelief and engage in a costly financial fiction, and a fear of the politicians of those countries of forcing that fiction on their people.