Media Call: Greek Bailout Agreement

Media Call: Greek Bailout Agreement

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Budget, Debt, and Deficits

Council on Foreign Relations Senior Fellow Robert Kahn breaks down the deal and explain what it means for the future of Greece and the European Union. Greece reached an agreement with European creditors that would impose harsh austerity measures in return for a financial bailout.


Robert Kahn

Senior Fellow for International Economics, Council on Foreign Relations


Douglas A. Rediker

Visiting Fellow, Peterson Institute for International Economics; Former Member, Executive Board, International Monetary Fund

REDIKER: Thank you everybody for dialing into this call. We've got Rob Kahn as our primary speaker today. Rob is the Steven A. Tananbaum Senior Fellow for International Economics of the council here in Washington, and he and I are going to start off by having a bit of an explanatory conversation about what's going on and what just went on in Greece—around Greece over the weekend and what our next steps.

I do advise everyone that this call is on the record, and after about 15 minutes or so of conversation, we'll be opening up for some questions and we'll let the operator actually describe what the mechanics of that are when we get there.

So, starting off, Rob, by way of background, everybody has read about a lot that went on over the weekend. There's a lot that went on overnight. So, why don't you just give us a 30,000-foot (ph) update on what actually happened over the weekend, what was agreed, and then what does it all mean. And then I'll weigh in on specifics thereafter.

KAHN: Well, Doug, thanks for—for joining me today. And as a shout out to people who don't know Doug on the call. Doug's one of the foremost authorities on these issues based on his time in market (ph), at the IMF, and in other policy positions. And so we're very fortunate to have you on—on this today. You're usually my first—my first read in the mornings on these issues when I can.

Yeah, last night really was quite extraordinary, and after what is reported as being an extraordinary volatile debate, that went through the night in Brussels, we had an improbable agreement—I think I describe it that way—that gives Greece one last chance to reform within the eurozone.

I'm sure everyone's seen the headlines. There's a broad range, an ambitious range of policies that have been outlined, and that the government will have to pass, starting this week.

And in support of that, there's the potential for a program that could reach as much as 86 billion euros, and maybe even more than that. And that is an extraordinarily high number, and it'd be worth a point—a comment right at the start. That number's more than 30 billion euros higher than the number that was being discussed about a week and a half ago before the referendum.

Now, part of that higher number reflects that this new program will have a longer horizon than the earlier discussions. Part of it reflects a greater appreciation of how much this decay—how much damage that this standoff in Greece had caused. And part of it maybe is also a more honest assessment about the state of the banking system and of the economy more generally.

Obviously, even this 86 is a bit of putting your finger in the air, but I think it does reflect that this is a very large financial program that is being envisaged, and—so there's a lot on both sides to play for here.

I tended to look at this—this agreement as really being three plans tied together. The first is a plan to get us through the next week. The government has agreed to pass, as I mentioned, a number of very tough measures that are at the core of any kind of adjustment program, and measures that they've been resistant to doing up until now. They were red lines for the government up until last week.

They include tax reform, significant reform of the pension system, and also automatic spending cuts that would go in place if there are slippages elsewhere. In return for getting those measures passed by Wednesday, a couple—they get—the Greeks get a couple of things.

The first is, it appears likely, the European Central Bank will re-institute and expand their emergency liquidity assistance to Greece. And that's critical to keep euros in the system and to keep a basic set of banking services there for people who really can't access the informal economy or the payment system well. And I think that's critical for domestic stability to get that—to have that happen.

But there's also a commitment by the Europeans to then come up bridge financing, to meet payments that are due next week. And they need about 7 billion euros to meet those payments and eliminate some arrears.

Doug, you're better prepared to talk about how that might happen than I am, but my sense is that it was some risk going into this meeting that there might be real divisions among creditors on how to—to do this.

But the agreement last night, in a sense, protects Greece from those debates. It says, essentially, if you do your part in the next week, we will find a way to get this bridge done.

So that first—that first piece is really the short-term liquidity. But it really is primarily, except for the ECB piece, most of the money that goes in is not going to give additional resources to the—to the government or the people of Greece, really is about a refinancing of debt.

The second part of the plan covers the negotiation that would then have to occur, it looks like, over the next month to—on a program with the Europeans that would be financed (ph) through the ESM facility. And that is the—the core element of European support for Greece. It's going to be a tough negotiation. The principals, the key areas of reform that would have to be in that program, be supporting by it or laid out in the document that was released today. But there's a lot of holes to fill in, and I would expect that to be a tough negotiation.

There are debt payments in the middle of August that would need to be refinanced. That will be a—a decision point for the Europeans and for the Greeks. But I think, perhaps, even more of a forcing (ph) event to keep these negotiations going, would be that until we get a deal that provides some additional resources to the government, you can't really get the banking system up and going. And fiscal policy will be so tightly constrained, I think, as to cause huge problems with the government.

It's in the government's interest to move very fast, I think, to try and get a deal. I don't think that will come easy. It'll be—and we can talk about this a little more—it will probably be happening a time of a lot of domestic-political turmoil. But I do think that, you know, there will be—there's an incentives on both sides to try and get that done.

The third part of the plan is the IMF, and I thought one of the interesting pieces of this agreement was on the one hand, a firm commitment that the IMF be involved, not just in monitoring, but financing. That was something the Greeks would—had hoped to avoid. But I think the Europeans wanted—always wanted the IMF involved. And in any event, the money—the amounts are so large here, they don't really have a choice.

But they, I think in a bow to the Greeks, agreed that the program with the IMF didn't have to come in until March of next year. And this is interesting in a couple of respects.

The first is that debt relief through extending maturities and through interest rate cuts, which—which was agreed, will only happen after the first review under that program is successfully concluded, which would be at the earliest next summer. So it means that debt relief is really at the back end of this program and will require a lot of compliance from the Greeks.

But it also means, in a funny way, the IMF, in a sense, is the residual lender here. If the program is—is moving along in a way that's generating additional financing needs beyond what is currently envisioned. There will be a lot of pressure on the IMF to—to—to really fill those gaps. That's something they're not going to be happy doing.

They have already made it very clear that not only, you know, are they worried about the program being adequately financed, there's really not much scope for slippage before you would need nominal haircuts to make this all add up. This has been ruled all out—out by the—the decision this morning.

So the IMF could well find themselves next March in a position where they are being asked to support a program they are in record as saying doesn't add up. So I think that will also be a critical piece of—of this puzzle.

So you put this all together, it is a path forward for Greece. One can argue that—that it could be successful, but I think you have to honestly say that the odds, for political and economic reasons, remain very long.

And for those of you that have read my—my blogs and other pieces in the past, you'll know that I think that the most likely scenario still remains a Grexit at some point.

REDIKER: So let me pick up where you just ended up, which is, go into that a little bit more as to why.

And if you think that Grexit is still the likeliest outcome, then did we all just go through, at least from a spectator standpoint this weekend—but for those who went through living in Brussels over the weekend, a pretty hellish weekend, by all accounts, why did they do it if, in fact, it's all likely to end up when where they sought to avoid the end-up (ph) anyway? You know, why do you think it's going to be a Grexit, and what do you think makes the leaders who agreed to a deal over the weekend feel that you're going to be wrong?

KAHN: Well, some start in the negotiations—my concern was that it's a very narrow path that any Greek government would have to take to become competitive and restore growth within the eurozone.

There's a lot of things you can criticize about how—what past Greek governments did or didn't do under their IMF programs. But one thing is clear. It has led to this extraordinary decline in activity, and very little hope of a turnaround any time soon, in that sense, very different from the kind of conditions—the kind of reform process but also the—the economic response we've seen in economies like Spain and Portugal and Ireland.

So I always felt that while there was a very ambitious plan that you could trace out that would allow what we would call the internal devaluation and reforms—you could have a dynamic economic that survived and prospered with the eurozone—that it really required everything to go right on the politics, on the economic reform process, and that for any government in Greece, that's obviously very hard, for this government, perhaps even harder.

And so I've always been skeptical that—that we could really manage that path. I don't want to draw too—too stark a line through why we went through this. I think to some extent, finance ministers and leaders make deals. That's what they do.

There is a—it's very hard for leaders to tell a country that does not—that wants to make one last effort, that wants to try and be successful within this regime, it's hard to say no. You can—you can offer tough conditions, but if that government looks over the precipice and says, "I really want to stay within eurozone. I want to try," it's very hard not to—to work towards a deal. And in some sense, these bigger considerations about whether or not the additional cost and the heartache and—that you touch on and perhaps the cost in terms of the politics in Europe are really worth the additional possibility of success.

But I do think—you know, I think many probably thought the—the Greek government was going to head towards the exit this weekend. But really, at the end of last week, we saw a government that appears to have just—you know, looked ahead and decided they were not prepared to handle the consequences of exit and essentially by accepting the policy—the policies that were on the table at the time from the credits basically create a dynamic which had to lead to at least an offer of a deal on very tough terms. It sounds like until the last minute, there was a threat of this all breaking up without success. But I think in some sense, that reflected the internal politics and dynamics of—of Europe.

REDIKER: So let—let's take a step a little bit 30,000 foot on this. There're a lot of different institutions and actors that are engaged in this, and we'll get into some of the technical details without boring people too much in a moment.

But you've got the ECB, you mentioned, the IMF. You've obviously got the Greek government. You have various national governments. Certainly, Germany's role was very, very dominant in setting terms over the weekend.

But can you go through your sense of, what institutions played what role over the weekend and moving forward? Are there winners? Are there losers here?

I would argue that Germany probably went into the weekend looking as if they could have been a winner. I think that they may have been accused of having overplayed their hand and came out much less a winner and possibly even a loser in some ways.

But the—Germany is one country. Are there institutions like the commission? Jean-Claude Juncker showed—there was no presence whatsoever, but Donald Tusk was present.

How do you see the broad complicated institutional relationships between national government, between institutions and, again, between the IMF, as outside European institutions looking forward as a result of what we've seen this weekend?

KAHN: It's a great question. It's also very tough. A few comments, and I would love to hear your—your views on this as well.

I—I think in—you know, if you look at these dynamics within Europe (ph) over the last several years, where deals were always expected and were less contentious than this negotiation, the commission plays a pretty important role as a broker between the two sides, and that has been—you know, preserved their—their—their clout, in a sense, in these—in—in—in these negotiations.

I think that was pretty badly challenged here, partly simply because the Greeks were—were being so difficult that the commission wasn't able, really, to play their role.

But also, I think, very sharp divides among the creditor countries that were revealed put the commission in a kind of situation of having to choose sides, and I think that that's always a difficult situation for them to do. And I think that their—their—their kind of efforts to first with the Greeks and then swing back towards the creditors, I think, didn't necessarily serve them well.

There—also according reports, it really took the intervention by the French to get the Greeks to understand the limits of their negotiating power and to get them—help them, actually, with the drafting of their counterproposal.

And if that's true, it suggests to me that in some sense, the commission's role was then taken over by the French, and that probably speaks well of the—of the French. If—if you think a deal was the right thing to do, that certainly speaks well to them. But I think it—it does—it does highlight some of the challenges going forward.

I'm interested in what you're saying on Germany, because certainly, there is an argument that says that they overstepped, they were certain—the very hard line that they took certainly was seen as intransigent. Some of the proposals they floated during the course of the weekend—a temporary timeout from the eurozone, foreign control over this privatization fund and the like—seemed almost putative and probably fed that as well.

But I wonder—I mean, I'll ask it as a question—whether or not we're also in a world now where the Germans will feel very validated that their concerns about moral hazard that you—that need to take a tough line to show that bad behavior will not be enabled and that, you know, in a sense, these type—this type of—you know, taking this kind of very confrontational path is not going to work out well.

And in terms of the message that would send to anti-austerity movements in other countries like Podemos in Spain or U-Kip (ph) I—you know, they may be sitting here today and saying that they did a very—you know, they did a service for Europe and that ultimately it will strengthen their role in future negotiations on integration.

That said, I think my bottom line is probably with you, that those negotiations are going to be harder to do now, and partly that reflects the polarization of views across the countries.

But where do you come down on this?

REDIKER: Well, I guess my sense and the reason I posed the question the way I did was I'm in agreement that Germany certainly is more vindicated in terms of taking a tougher line, having come into last week at the end on the basis of the proposal that was agreed to with the strong input of the French at the behest of the Greeks. That was what we saw all of 72 hours ago, where that was seen as capitulation already.

The dynamic that played out over the weekend seemed to me to be in part driven by a technical need to meet hurdles both mathematically—the numbers needed to add up—as well as legally because there were certain technical impediments that the—that member-states in the eurozone need to meet in order to make it to the next step.

But there was an element of what was perceived to have been not only overreach but actual vindictiveness in the way it played out, at least in the Twittersphere, in the blogosphere, in the press, and that that may, in fact, have tilted a little bit too far in that direction. My understanding is that that was seen as necessary for German domestic politics. I understand that, but I think one of the fragilities in the European Union and the eurozone is this balance between governments that need to play to a domestic political audience and having to balance that against their role as members of the broader eurozone or European Union or even beyond that, the troika or the institutions.

So I'm not sure how Germany comes out of this. I think it may well end up being a double-edged sword. Even if they're right on given specific issues and even if—let me be clear, my own personal perspective, much of the damage done over the past six months to Greece was inflicted by the Syriza-led government.

Nevertheless, it does seem to be—there may have been other ways that this could have been handled over the weekend, even at the margins, that might have resulted in a somewhat more benign outcome, but it remains to be seen.

And let me go back to the other part of the institutional framework I was raising, which is to ask you what you think about where the IMF ends up in all of this as a result of one of the two outstanding sticking points in the wee hours of this morning to get a deal done, an existential deal, in fact, was whether the IMF would play a role moving forward, and Greece's insistence that they not be a part of it and ultimately having to cave on that point.

I would make the argument that the IMF, having put out its debt sustainability analysis a week-and-a-half ago, which was enormously—which put great emphasis on debt relief to the point of even suggesting under certain scenarios a natural principle-based haircut in the form of—as a form of debt relief, it would be necessary to put Greece on a sustainability path, that that would be more consistent with where Greece wanted to see the outcome end up.

It would—it surprised me that they would have been so adamant about not wanting the IMF to play a role, and one could also argue from the IMF perspective that they might be fed up after five years of this and say look, this is Europe's problem, let's let Europe do it.

Why do you think the IMF was so willing to be in—a major sticking here point here such that they ended up being a point that, you know, went into the wee hours this morning, and do you think the IMF's role—you made allusion to it in your opening remarks—do you think this is going to be seen as productive, constructive or potentially a point of conflict moving forward for any or all parties?

KAHN: Well yeah, I think—the IMF was always going to have to be involved in the monitoring and the program development. Europe doesn't have the capacity to do that, so the debate was financing and whether there would be a visibility to it in the form of a troika or the institutions, I guess, as we're now calling it, in a way that would—that the Greeks as you said clearly did not want to see.

I do think there is a growing doubt, second guessing within the fund about how effective they've been in Greece and their involvement over the last several years. Part of this is this broader debate about austerity and how fiscal policy should be designed. But even more so is a question of ownership and real concerns about whether any Greek government would do what was needed.

But I also think, you know, there's this interesting dynamic that's going on within the official sector where, particularly, you have this sort of situation where there's maybe a path forward but bad policies are—you know, a deal with bad policies are worse no deal and exit in devaluation. And I do think they were very concerned that the natural negotiations and give-and-take were going to lead, over time, to a weakening of the problem, a large financing gap which, in some sense, has already been validated, and a shortfall in financing that would essentially fall onto them. And I think they were very much trying to resist that.

Maybe there was also a bit of politics. They wanted to signal to the world that they were willing to be—that they weren't in a sense in the pocket of creditors, they were going to be tough on both sides. But I think that argument that they made in the DSA that you have to couple—if you're going to—if you're going to have less austerity, that's fine, but you need to finance it in a sustainable way. And that involves, you know, extended maturities and interest rate reductions.

I think that is very much their current thinking and I think that, you know, in a sense, they wanted to avoid exactly where we are heading now. I read that DSA—just one more point on this is is I read that DSA, Doug, as saying essentially we're going to be a world of nominal haircuts pretty soon because, you know, there was no give in that—in their analysis.

Basically, the argument was we can just barely finance this with extending maturities and concessional rates. If there's really any more, if there's any slippages, any more problems, we're going to need nominal haircuts and, of course, that's been ruled out now, but I could see us very much being in that situation pretty quickly.

REDIKER: And last question and then we're going to open it up to the people on the call. The ECB. Several years ago, Mario Draghi changed the trajectory of the Euro crisis by uttering the famous words "whatever it takes." And that was in the context of keeping the Euro as an irreversible currency.

Where are we now in relation to that commitment to keep the Euro as an irreversible currency, given that Euro exit was explicitly put on the table, even if it was in the form of a quote, "timeout" by the Germans over the weekend. And until the last minute, it was going to be part of the overall statement that was issued by the leaders.

So where are we on that, and also as it related to the ECB question, one might have thought that with an announcement of an agreement this morning, that the ECB might have already lifted its ELA cap. That's emergency lending assistance that is keeping Greek banks liquid, even as they are closed it allows for cash in the ATMs to be replenished. And yet that cap was not increased today. Do we the ECB is seeing itself as a technical reaction to political decisions, or are they themselves playing a political role here?

KAHN: I don't see how you cannot conclude that they're playing a political role. Certainly, they have to maintain publicly that they're technical. The Euro is irrevocable and they have to basically provide for financial stability within that zone. But I think the honest answer is they are at the center of these decisions because of the critical role that domestic liquidity and arrears and the like play in the sustainability of these kind of discussions.

Just in the last week before the referendum, if I remember correctly, the ECB provided around $9 billion in ELA support to match the run on deposits that was ongoing there. By their rules, they probably shouldn't have done it. They have to make a judgment that the banks are solvent and the collateral they were giving, much of which was government—Greek government bonds was sound, and I think both of those were dodgy judgments.

But in fact they didn't want to be the ones pulling the plug on the Greek government, and so they continued to provide it while signaling to—to governments that this was limited. But I think that they were drawn further into this than perhaps on a technical sense they would ever have been. And I think they understood that Greece could exit, and that ultimately they could have been left terribly badly exposed financially, and with maybe their capacity to implement monetary policy being affected.

Now, if I recall correctly, and I think you were—you were at the fund—the fund board at the time, you know in 2012, they—they did seek and were able to get guarantees from European governments on their exposures on Greek—on Greek assets. And I think the presumption was they would have sought that again. But I think they very much at the center.

I was a little bit surprised that they did not expand ELA even today. I thought it would've been a strong good-faith gesture to allow—to signal that there would be adequate liquidity and there would be currency in the system.

But you know, I think that there—I also understand the argument that says that the trust level is very low. They do not want to ever be seen as an excuse for inaction, and so waiting until these measures are passed by the Greek government is in a sense maybe the politically more sensible plan.

REDIKER: Thanks. Operator, we're going to open it up.

Rob or anyone on the call, if anyone knows what it was that prompted the reported conversation between Schäuble and Draghi in which Schäuble responded allegedly, "I'm not an idiot," or something to that effect, I'd love to know what the sentence that was uttered before that, that led to that rejoinder was. Anyone who has that, that would be great online or elsewhere.

Other than that, operator, if we can open it up to questions please?

OPERATOR: At this time we'll open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touchtone phone now.

Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, just press star, two. Again, if you would like to ask a question, please press star, one.

We are currently waiting for questions.

KAHN: Doug, while we're waiting for the questions to queue, maybe it's unfair, but where—how do you feel about the role of the fund and whether it was damaged by its involvement in this process?

REDIKER: Thanks Rob. Appreciate it.

KAHN: Yeah.

REDIKER: How do you define "by this process?" Do you mean over the last five years or...

KAHN: Well yeah, that's probably the right way to ask the question, although certainly the last three months were particularly stressful for the institution, I think.

REDIKER: Look, I think that the IMF five, six years ago, as people may have forgotten, was at a point where its own relevance moving forward was in your sharp question. When Dominique Strauss-Kahn came on, it was a question of how do you restore the fund's relevance?

I think the Euro crisis in that regard certainly put the fund back squarely in the center of the most major debt questions in the world over the interim five years. Whether everything that was undertaken was undertaken as it should have been, I think clearly there's a lot of history that's going to go back and a lot of people who are going to rethink how the fund responded at any given time.

And certainly there are a lot of charts out there that show fund projections having been way off the mark, not just in case of Greece, but in many different areas. So I am certainly not critical of the effort, but history will show what it does.

I will say from a personal perspective that I think those who look back on what the fund did in the case of the Greek crisis at the earliest stages, and who argue that the fund and Europe were complicit in putting all of the burden unnecessarily on Greece without regard to the fact that there were European financial institutions that ended up owning a lot of Greek debt that escaped at least at the initial terms, what would have been a bail-in. I think that that is in some way guilty of 20-20 hindsight, because at the time, you had an enormously fragile international financial system, and an immensely fragile European financial system.

And by transferring the bail-in burden to those institutions at the time of the initial May 2010 program might have actually caused an outright systemic collapse of European financial, economic, and political systems.

You'll never know. You can't prove a negative. But I don't think that those who will look back and say that Greece would have been better off had European financial institutions borne the brunt of the bail-in that was then suggested. It actually is a more nuanced question.

So I'm not defending any given policy. But I do think we have to watch out for being guilty of 20-20 hindsight. And with that, let's take questions.

OPERATOR: Our first question will come from Carol Williams with the Los Angeles Times.

QUESTION: Hi, my question is for Robert Kahn.

What do you think are the prospects of the Cyprus government being forced to resign due to the Syriza defections and the independent Greeks already coming out and saying they're not going to back these parliamentary and the legislation that's being demanded by Wednesday?

Is the current government disciplined enough to deal with the political fallout later after the—after meeting the Wednesday deadlines?

REDIKER: It's hard to be confident predicting that they are. It's a new government obviously. It's not a—represents an extraordinarily broad range of views, and there's obviously many people in this government who are deeply hostile—ambivalent, if not hostile, to the agreements that the prime minister is coming back with.

Based on the earlier vote, it's pretty clear. He will not command a majority from his party alone for this bill. He will have to rely on opposition support. And so I think he's going to have to make some moves in that regard. I—not an expert on Greek politics. Certainly a lot of the local press is suggesting, at a minimum, that he would have to purge the dissonance, and try and reorganize within Syriza.

There seems to be a lot of discussion that would suggest that he may have to—to reshape the coalition, and I suppose it's even possible you could get—you could get snap elections out of this. Although that would, I think, occur after this week's and next week's measures are—are passed and maybe even after an initial agreement on the MOU.

I think the optimists are hoping for something that might resemble a kind of technocratic government, at least to get us through the negotiations with the Europeans.

But you know, though, for all that talk that Cyprus (ph) has, you know, played his cards terribly wrong, that he is badly damaged because the policies come back with and look so austere relative to what we think could have had earlier on and the like.

You know, it does seem to me that the referendum and the follow-up to that limited a lot of the opposition leader—the credibility—hurt the credibility of a lot of the opposition leaders or a lot potential opponents to him.

I—looking at the field, I'm not entirely sure if he were to go, who stands—who stands up in his placing, and carry forward this program. So, I do think there is—I certainly think it's quite possible that he could—could weather this storm, at least for a period of time until possibly we got some sort of new elections.

KAHN: Great, next question.

OPERATOR: Thank you. Our next question will come from Byron Wayne (ph) with Blackstone (ph).

QUESTION: Yes. I sort of see it differently, and maybe I'm naive on it. I think he came out pretty well. Maybe he could have negotiated a better deal earlier, but look what he got. He got over $90 billion dollars to sustain the government, pay the military, pay the employees, pay the pensioners.

He's still in power. I think he—his authority was vindicated by the no vote. I—you know, my feeling is—Greece is still in the Euro, still able to use Euros. The banks will re-open. And so I—I think he had to give in on all of his demands, and maybe he would have only had to give in some of them. But if he had negotiated earlier, he wouldn't have gotten nearly this much money.

And I think they need the money because there's no prospect of Greece running a surplus anytime soon. And when this money runs out, they'll probably need more. And they've set a platform for it in most of the demands—most of the reforms that the European Commission and others are asking for were reforms that should have been made long ago.

So it looks to me like he came off as the winner here, and Europe came off as the loser. So what am I—how am I seeing it wrong?

KAHN: Well, you know, certainly you're right to say that if they do all these measures—and much of this money they will not see for a couple of years—if they do all the measures here, you will have a fundamentally transformed economy, and hopefully will be much more resilient.

And as you say, it would—that transition would be well financed by the Europeans. That $90 billion dollars or so, but a little more than half of that will go towards amortization and interest, and then there might be some additional debt relief on top of that. But there is certainly a significant amount of money in this, as you point out, for fixing the banking sector and—and for some additional fiscal policy measures.

So, you know, I see the point you're making. It does—the part that is hard for me to square with that is that this is a—you know, if you look at the policies that he's agreed to, this is a—sorry, a very orthodox set of economic reforms. It is something that the international community has been trying to get done in Greece for a long time. Governments of all political leanings have been unwilling or unable to make these kind of reforms.

And this government came in explicitly—with a policy that explicitly rejected these and felt that these—many of these policies would be unjust in terms of their social or economic consequences. So, you know it is hard to square what you—you know, the perspective you're bringing to bear with the one that at least they are stated to be bringing to the policy problems.

If they do everything right and they're successful within the eurozone, and you have a Greece that is growing in three years, I think it's win-win in that regard, because you will have avoided, you know, the kind of economic wreckage that—that exit would have involved.

But Doug, how do you—how would you answer that?

Help me out here.

REDIKER: Well, the only thing I would add is I think that the loss of sovereignty and outright international humiliation is something that is not necessarily paid for by the price of getting 80 or 90 billion euros or dollars over an extended period of time, as Rob, you pointed out, half of which goes to replay intra-Troika debt anyway.

So it's one thing to say "gee look, we have a big financial hole and somebody else is going to pay for it." The cost of reforms that many may believe are necessary but the political humiliation of knowing that you have no autonomy anymore to select any of the policy choices that any government ought to have in their own mindset. I think that that is a huge political loss, and one that risks some you know, social upheaval and political turmoil that isn't really easily calculated on a spreadsheet.

QUESTION: Yeah but balance that social upheaval over—against the chaos that would have occurred if they had defaulted and had to issue IOUs and eventually drachma, and the loss of money that—the loss of money that depositors had placed in the banks. I agree. But it seems to me that Greece only got into this mess because of hubris, and they deserve some loss of sovereignty as a price to pay for that.


REDIKER: I was going to say, clearly that's what the Greek prime minister felt as well. That's why we ended up where we are.

Sorry, Rob, yeah.

KAHN: Yeah, I was going to say, it is always going to be the—you know, when we're trying to decide should a country stay within a fixed currency regime and take on the adjustment costs that are associated with getting back to full employment within that fixed exchange rate regime, versus the alternative of exiting? These exits are never going to be managed smoothly. They are always going to be extraordinarily disruptive and painful and scary and that's true in countries with strong—with lesser or better policies, and certainly the history from countries like Argentina to Russia and the like is one of very painful dislocations.

I—I do think policymakers, you know, when they're sitting in that moment, they have, as an economist (ph) would say, a high discount rate, right? They are very scared to take on those costs. And I think there may have been an element to play here that it wasn't so much a calculation that these—the policies they were being asked to do were—were worth it, given the financing that was being brought to bear, and just notwithstanding the humiliation that Doug rightly raised, but simply that in a short term sense, they did not feel prepared to manage what would happen if they exited.

But that doesn't mean we won't be facing an exit decision in three or six months, and that at that point, they may feel much more comfortable taking that step.

REDIKER: How about our next question, please?

OPERATOR: Again, ladies and gentlemen, if you would like to ask a question, please press star, one now.

Our next question will come from Ellen Fedder (ph) with J.P. Morgan.

QUESTION: Yes, hello. Thank you very much for your very interesting insights.

So my question is actually on the immediate next step within the eurozone partners, and the sense that Germany will discuss this deal within the Bundestag on Friday, but other nations have been floated around in the press as well as nations that need to ratify this in their parliaments.

I was just wondering, do you have any insight on who else has to go to parliament and if there are any potential roadblocks on this deal on those nations?

Thank you.

KAHN: I want to take a first stab—let me take a first stab at that. Doug will add or correct.

So you're right to say that several Euro area countries will have to approve the—the mandate to negotiate, to approve the agreement of last night, the mandate to the negotiate the ESM. As I understand it that at a minimum, Germany, Finland, Netherlands, and Austria must have parliamentary approval, but that I believe Estonia, Slovenia, Portugal, it's either, it's not required, there's a presumption that they will do it.

And we've also had statements this morning from the French that they would bring it to a vote probably on when—as soon as Wednesday, and would show their support for the process. So it's not only a significant number of the Euro area countries, but it tends to be some of the more hawkish ones. And it takes to a point that Doug touched on earlier in terms of parliamentary and popular backlash, I mean part of this whole process is reflecting very strong pressures in some of these countries from their parliaments to—to not be terribly accommodative.

That said, at least as of now, except perhaps maybe Finland, I think the expectation is that these—these measures will pass this week.

QUESTION: Thanks. A follow up.

In case Finland shouldn't pass this week, do they need—are they fine with it because they cannot (inaudible) 85 percent overall, or would actually would Finland potentially actually really be—be an issue in that process if they—if they decide to vote against it?

KAHN: It's a legal question. I'm not an expert on that. Certainly, my operating presumption is that if the emergency procedures are called in, we need only 85 percent to move forward. So then the—then governments could meet and decide to open negotiations based on an 85 percent vote, and which Finland would vote against.

QUESTION: Great. Thank you.

REDIKER: Yeah, I'm not sure—I'm going to take issue with that a little bit, Rob.

I think that in the extreme case, the 85 percent threshold can be the relevant threshold. But the actual threshold that is if the governments all believe—if the ECB and the commission jointly agree that the sustainability, not the stability, but the sustainability of the Euro area and its currency is at stake, then they can drop down to 85 percent.

I find it implausible to believe that the commission and the ECB would argue that the failure to go ahead with this deal would actually result in a threat to the sustainability of the currency itself, given that they put the Grexit option on the table over the weekend as well. So I think that if they need to get that 85 percent, they in Europe can find a way, but I don't think it's an easy way to slot into the existing technical, legal structure as is.

KAHN: So, Doug, are you assuming, then, that the Fins would at least agree to allow the negotiations to move forward in their vote?

REDIKER: I'm agreeing that I hope that that's what happens and that it is not an individual country. I believe the statements out of Finland have been a little bit mixed, but I think the last thing I saw was that the Fins said they would never consider it a gift—I believe it was unconditional financing. And clearly, this is about as conditional as it gets. So that might be where they play with the language. We'll see.

Operator, next question, if we have one.

OPERATOR: At this time, we have no further questions. I would now like to turn the conference back over to Mr. Doug Rediker.

REDIKER: Great. Well listen, Rob, I mean, I think that I found this illuminating. I hope the people on the call did as well. My sense is exactly what you started with, which was this is, at a minimum, a three-step process—that's three steps at the highest level. Each of those steps has multiple steps subsumed within it, so there's a lot of accident risk here.

I'm going to go out on a limb here and say I'm going to be a little more optimistic and hope that your prediction that we end up in a Grexit scenario in a medium-term timeframe. But that's not the case, but I'm certainly not ruling it out.


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