Media Call: Greek Debt Crisis

Media Call: Greek Debt Crisis

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Budget, Debt, and Deficits

Senior fellows from the Council on Foreign Relations break down Greece's referendum on a European bailout package. Voters rejected a deal that would have imposed tough austerity measures on Greece.


Kenneth S. Rogoff

Senior Fellow for Economics, Council on Foreign Relations; Thomas D. Cabot Professor of Public Policy and Professor of Economics, Harvard University

Sebastian Mallaby

Paul A. Volcker Senior Fellow for International Economics, Council on Foreign Relations

Robert Kahn

Steven A. Tananbaum Senior Fellow for International Economics, Council on Foreign Relations


Neil Irwin

Senior Economics Correspondent, New York Times

IRWIN: Welcome to this call, everyone. Thanks for the Council on Foreign Relations for organizing it. Obviously it's an eventful time in Greece and in Europe. And we're going to talk about so many of the issues raised by this eventful time.

A little housekeeping to start. This is an on-the-record conference call. The audio and a transcript will be posted on after we're complete. I'll introduce our guests. But first, just a couple of comments on where we stand.

We had this remarkable Greek referendum yesterday in which the Greek voters overwhelmingly said no, that they would not accept the bail-out being offered by European creditors.

It has been an eventful time since then. The finance minister Varoufakis has resigned. We have seen responses from some of the Northern European countries, from the IMF, from the ECB.

You know, it's funny, Ken Rogoff, who is on this call is great at chess, well, this is quite a chess game with a lot of players interacting in ways that are hard to predict. And truly the future of Greece and the future of the European Union hangs in the balance.

So with that, we have a great deal to discuss. Our guests today, so we have—sorry, Sebastian Mallaby is the Paul Volcker senior fellow for international economics at CFR. He is the author of "More Money than God," about the hedge fund titans, among other excellent books on economics. Sebastian is joining us.

Also we have Rob Kahn, the Steven A. Tananbaum senior fellow for international economics, also at CFR. He is also the author of the "Macro and Markets" blog at

And, of course, you have Ken Rogoff, the CFR senior fellow for economics, and also a professor—the Thomas Cabot professor of public policy and professor of economics at Harvard, and a former chief economist at the IMF. Some people who know what they're talking about.

I think we'll dive straight into questions. Sebastian—sorry, let's start with Rob, actually. Rob, tell us your view of what has happened today. Since this referendum outcome last evening, it has been an eventful day in Greece, in Frankfurt, in Brussels, and a lot of us are just trying to keep track of it all, understand what is happening and what it means.

Walk us through what we know now that we didn't after these election results came in last night.

KAHN: I think we know a couple of things. Prime Minister Tsipras has used a very strong result—referendum result to consolidate his power. He has received a strong endorsement across parties for a debt relief proposal. He has also replaced his finance minister, as you mentioned, with Euclid Tsakalotos.

I don't think that represents a material change in policy, but as a signal Greece's creditors that there is going to be a less confrontational path, approach taken in the meetings, is probably a smart step.

The ECB met earlier today and decided not to raise the Emergency Liquidity Assistance provided to Greece. That is critically important because it means that without additional assistance, the ATMs across Greece will probably start to run out of euros as early as tomorrow.

They also raise what the—so-called haircuts, the amount of collateral that they will require from the Greek banks in return for liquidity. That will make it harder for them to access additional liquidity in the future.

Each day the ECB is going to meet to discuss this. And I would argue that going forward those meetings are probably (INAUDIBLE) and the other for determining how tough things are on the ground and where Greece goes.

The third track is a negotiation track. The prime minister repeated his promise to the population that he could get a better deal that involved debt relief, less austerity, and changes the rules of Europe.

And so we'll see. He's going to go to Brussels tomorrow where there will be a finance minister meeting in the afternoon, then a leaders meeting in the evening, in which he'll present his proposals.

I don't expect anything to come out of those meetings, but it is a start of really a last chance effort to try and see whether there is a deal that can be agreed that keeps Greece in the Eurozone.

IRWIN: Thanks. So you laid out some of the crosscurrents happening here, one of which is finding out how the European creditors will react to this turn of events, and whether we will see more constructive negotiations in the days ahead than we saw in the—over the last week, which were nonexistent.

Sebastian, how do you read what we're hearing out of the European finance ministers and prime ministers? How receptive will the European creditors be to trying to make a deal with this more emboldened Greek government?

MALLABY: Well, Neil, amongst the many oddities of this story is the idea that what seems to be kind of I think probably sincerely held by the Greek prime minister, Tsipras, the idea that he would be more likely to get a concession out of the Eurozone after the referendum than before.

I think that implies that the blockage to getting a concession had been some sense that he didn't have enough of a democratic mandate within Greece to be demanding what he was demanding.

But that really has nothing to do with the German objection to providing softer terms. The German objection is much more about German politics than it is about Greek politics. And a referendum in Greece does not actually change German politics.

So what I'm saying is I think the Germans have been tough, along with the other creditors, on Greece. They feel they cannot make a special exception for one Eurozone member because that would only encourage populists in Spain and other countries.

And they also feel that even if they were generous, the money would be wasted because the current government in Greece has demonstrated by its actions that it's unreliable, populist, and generally irresponsible.

And I don't think any of that changes after the referendum. In fact, in some ways it's worse. You've got the entrenchment of the man, the prime minister, that you couldn't deal with. And you've got a reaffirmation of the fact that he is likely to continue to behave in that fashion because look at his referendum that just supported his brinkmanship.

So I think, you know, the parts of the political leadership amongst the creditor countries, for good reason, would dearly love to avoid the precipice and keep Greece in, because the idea of a failed state, which is what I think Greece end up being, within the Eurozone—within the European Union, if it were to remain in the European Union after leaving the Eurozone, is not attractive. The idea of a failed state within NATO is not attractive.

So there are good reasons not to rock the boat. But I think that the sort of default path right now is that, you know, Greece is not going to be able to offer more plausible promises of cooperation than it could before the referendum.

And since there was no deal before, I don't think there will be a deal after.

IRWIN: Thanks.

So we've heard a bit about these crosscurrents between Athens and Brussels and Berlin. There are, of course, other—it's not that simple a negotiation. There is also the IMF playing an important role and the ECB playing an important role.

Ken, how do you interpret—how would you expect the Fund and the ECB to react to these recent developments? And what role would you expect them to play in any talks or negotiations that go forward from here?

Did we lose Ken temporarily?

Rob, you want to take that?

KAHN: Sure. Ken will, I'm sure, have good views on this when he gets back on.

Let me start with the IMF, which is an interesting position here. Really starting about two or three weeks ago, with a blog, that Olivier Blanchard, the research director, put out, and then with a paper that was released mid-week, the IMF has tried to chart a course midway between the creditors and the debtors.

And part of this was an effort to show that they were as hard—they were hard on both sides. And so the argument they were making was that there was a case for less austerity than the original program had, but you still needed very strong policies, and you needed to couple it with significant debt relief.

And so they are both pushing Greece to do the policies they haven't been willing to do before, but also pushing the Europeans to be far more explicit than they had been on committing to debt relief.

Now some of this is a little bit self-serving, because if you look at their document, they show a very large financing need for Greece, even if Greece accepted all the creditors' proposals and implemented them, something on the order of 50 billion euros over the next three years.

It's a large amount, and if you read between the lines, they're basically arguing that you can't really fill that gap unless you also have principal haircuts. And they don't want to be on the hook for a large part of that financing or, of course, for any of the debt relief.

So in some sense they're trying to say, we'll only support a very aggressive program that has that debt relief, otherwise don't count on us to provide all the financing.

Now whether or not they're really going to be able to resist, whether they're going to be able to resist the pressure from their shareholders to actually lend if there is a program is a very interesting question.

But hopefully we have Ken back on, and he can take over from here.

OPERATOR: Yes, Ken is back on.

ROGOFF: I am back on. Sorry, can you just fill in the question again? Because my call got dropped. I'm back on a landline.

IRWIN: It was on the role of the IMF is playing, broadly, in terms of trying to navigate a deal, but also in terms of their recent statements, Olivier's blog and also the report they put out last week on debt sustainability.

ROGOFF: Well, it's certainly complex. I mean, I think they've acknowledged that back at the beginning they should have had a haircut then on the private debt, instead of taking—taking it over—taking it off the hands of French and German banks.

I don't think that would have materially changed the austerity Greece feels, contrary to a lot of the—what you read in the press, because the fact is that until now, you know, by and large, money has been flowing into Greece, not out of Greece. The creditors have made loans not only enough to pay off the private debtors, but enough so that Greece did not have to tighten its budgets as quickly as it would have otherwise.

Going forward, however, you know, the program calls for debt repayments which are unrealistic, and nobody seriously expects them to get paid. I suppose the IMF is in an awkward position that it has put out a lot of money into Greece that I think it regrets having not forced the haircut first. And I suppose it must be hoping that it's going to get bought out at some time by the European stability mechanism so that the default takes place through that, rather than the IMF.


So they have a couple of things going on. They're dealing with Greece. They're dealing with the fact that this could be really a record debt write-down for the IMF if they don't get it taken off their hands. And they're dealing with the fact that this was an incredibly lax program, despite all the rhetoric surrounding it. It really compares to the Ukraine 2008 to 2012. And it's very awkward.

On the one hand, you know, they want to get repaid. They see that things in Greece are impossible. But on the other hand, there will be debt crises again in the future and they risk their credibility in the future if they just sort of maintain—you know, don't ask for any reform or conditions, and every time Greece doesn't do it, they just back away. That was really the experience in the Ukraine program—this is pre-Crimea.

So they're—they're in a difficult position. I think (inaudible) kind of laid out that they want to get repaid; didn't say anything as blunt as I just said, but you know, they're certainly, you know, trying to navigate and steer things as much as possible into the court of the Europeans.

IRWIN: Thanks.

So Sebastian, that brings us to the ECB. It seems like the Greek banks are surviving, if they are surviving, kind of solely on ECB liquidity at this point. What do you think the attitude is in Frankfurt? And how much room to run, if any, do the Greek banks have and the Greek financial system have to work with?

MALLABY: Well, Neil, you wrote a great book on central banks. And I think you'd agree that the desire all the time among central bankers is to be following a set of rules, because that makes you look less political. And discretionary judgments, which have big, you know, real-world political consequences like, for example, completely cutting off the Greek banks so that they close and Greece descends into even more chaos, is not the kind of thing that any unelected technocrat will want to do.

So, in some sense, the European Central Bank is playing a game a big like the IMF. It's trying to protect its own institutional interest by not being the one that pushes Greece out of the window. So it wants to be, you know, loyal to its rules and be taken seriously in the future, just like the IMF, and not lead it to, you know, register a note of, you know, disciplinary concern when the collateral that it's holding in exchange for large amounts of liquidity provided to Greek banks is clearly not worth much because it's Greek sovereign debt and the Greeks are clearly going to have difficulty repaying that.

So, therefore, they've just today, the ECB has demanded that it be given more collateral in exchange for that liquidity. So it's making a gesture of sternness, but it doesn't want to be too stern because then it becomes responsible for, you know, pulling the trigger. And what I think the ECB would love to do is, you know, stay in a holding pattern so that nothing it does triggers a disaster, and then pray that the political leadership meeting tomorrow is willing to guarantee the sovereign debt of Greece that it holds as collateral, such that if there were a problem in, you know—if the ECB looked as if it was about to take a hit itself because of all the money it's been lending to Greek banks, it would be made good by governments.

IRWIN: Thanks.

Rob, can we talk a little more about what's going on on the ground in Athens with the Greek government? Do you interpret the ouster of Varoufakis, who the creditors seem to really dislike, does that—does that signal that there might be some room for a more constructive form of negotiations in this next—next phase of things? Or are you—are you optimistic or pessimistic on the ability of the Greek government to have constructive negotiations with the creditors?

KAHN: Well, I'm pessimistic. Certainly, you've heard that argument. There are people out today with headlines like, you know, "Tsipras Blinked" and the like; that somehow firing Varoufakis was a signal of a willingness to take the deal.

I'm not convinced. He had clearly become highly toxic in terms of discussions with ministers. And whatever you think is the path the prime minister is likely to take, changing [finance] ministers was a good step, an important step. And at least, you know, is a signal of good will. I don't think, though, it really changes the negotiations in terms of the actual substance of the policy.

You asked about the situation on the ground. I think that is critically important because I do think sitting here in capitals, there is a tendency to look at these negotiations in terms of critical external debt points. You know, on July 20th, there's a 3.5 billion euro payment to the ECB, or other debt payments, and say, "Well, it has to be done by that date or everything will blow up."

I actually believe that what's really going to drive this crisis are—is the domestic financial situation. And there, the story is quite dire. I think what we're seeing with the banks being closed, there is kind of a basic payment system that can operate electronically even with the banks closed, but even that we've seen some breakdown.

But even more importantly, that doesn't service all Greeks. There is a good segment of the population, particularly pensioners, who rely on cash and rely on getting those pensions out of the bank and being—and getting spending power. And as those ATMs run out of notes, I think you're going to see significant economic and financial distress. And that's really going to become the driver for what could be a relatively quick decision by the prime minister whether or not there is a prospect for a deal or whether he's going to have to go another route, which presumably means exit.

And that's why I said earlier I think the ECB's decision-making, and Sebastian references it too, becomes critical. If they get the kind of cover that allows them to not only take those haircuts back down, but perhaps increase (inaudible), then you basically are ensuring that there is some flow of liquidity into the Greek economy. And it keeps some basic payment system going.

I think that gives time for the negotiations to proceed, but it is at a price. And so—and that's—I think that will become critical in which way they go. But you do have a government that really feels the clock ticking because of what's happening on the ground domestically.

IRWIN: So, Ken, you've—you've written extensively about—about the history of financial crises. Can we talk about as Greece faces its financial crunch and its banks are illiquid, if not insolvent, what—what are the kind of middle grounds? What types of options exist in terms of some form of IOUs or scrip, something outside the eurozone monetary system, but that allows them to limp along while these negotiations proceed? Is this a bright line of either leave the eurozone or don't? Or do you see some—a continuum and some options in between that they might pursue?

ROGOFF: I think it's certainly a continuum, but all of the options are pretty bad. And at the heart of it is that the government has promised them less austerity without saying who's going to pay for it. Because frankly, even if all the debt were torn up, they would still be stuck with the fact that they've had to make massive cuts because they were spending far above their income. That's really the core problem that they're trying to deal with in the short run. That's the short-run problem. The debt is a long-run problem.

But yeah, I mean, this unfortunately happens all the time. It happens where bank depositors, you know, lost a lot of their money. That happened in Latin America in the Argentine crisis, which is maybe the closest parallel to that. The depositors ended up with pesos that were worth much less than the dollars they originally thought.

There are mechanical problems about sort of switching over temporarily to a currency because—a new currency because my understanding is it will take about a year to print up the currency. They're not prepared. They can issue—government IOUs to employees, to suppliers, that sort of gradually turn into a currency.

And of course, the thing is that this is very sudden. It's—it's unpredicted. It's not something anyone wanted. And so there's a lot of transition pain. But eventually, I think what—what I think is the most likely thing is not a full exit from the euro, but a soft exit where Greece has capital controls. A euro in Greece is worth less than a euro outside of Greece. And that—those capital controls eventually give Greece time to decide what direction it wants to go in.

Because after all, no one can really force structural reforms from the outside. It has to be something the country decides it wants to do, as we've seen yet again in Greece. And they've yet to really identify how they're going to address their problems. And that's, you know, that's the problem—that's the core problem that really faces Greece.

IRWIN: What—Sebastian, we've, you know, we've seen a significant market reaction to this last—last few days and last week or two, but not—not really what we were seeing back in 2011, first half of 2012. Are markets being too complacent? Are there economic and financial risks out there of about whatever lies ahead that we should all be nervous about? Or is there really a firewall in place to keep this from spreading to other peripheral Europe countries, other European and global banks? How confident are you that the financial—the global economy, the global financial system can withstand whatever it is that happens next?

MALLABY: Well, you know, you can never be completely confident, but I veer towards confidence, let's say. And I say that for two reasons. One is just the size of Greece. So, you know, it's a smaller economy than Louisiana, I believe, so it's—it's really, you know, in that sense, not a huge shock to the global economy.

When you had a lot of financial market turbulence three years ago, we were talking about Italy being at risk, Spain being at risk. These were much—much bigger economies. So that's point one.

Point two is that, you know, as we've been discussing on this call, there's already been this switch of debt. So, you know, the private-sector debt holders have more or less exited. You know, they had a belated haircut, so their claims were greatly reduced anyway.

And nearly all of Greece's debt is payable to either its domestic banks—so that's an internal problem with Greece—or foreign creditors who are either governments or international institutions, like the IMF or the ECB.

And so you're not going to have a kind of Lehman type of panic where there's contagion through financial markets, because everybody had derivatives deals with Lehman, everybody had accounts that were being frozen in London, and that's why you got that extraordinary sort of magnification in—in the Lehman Brothers case.

Greece is not Lehman; it's the polar opposite of Lehman. It's a remarkably, you know, not interconnected financial entity. It's a very sort of—you know, sort of stand-alone one with—with linkages that are essentially to the official sector outside, not to the market.

ROGOFF: If I can just add something to that...

MALLABY: Please.

ROGOFF: I think Greece has lost a lot of leverage by calling this referendum, now really being on the brink of exiting the euro. And so far, there hasn't been a lot of contagion. That was a lot of their leverage in these negotiations.

Yes, the Europeans want to help Greece, but it's also true that the Europeans were worried about contagion. Maybe it was a 5-percent chance. Maybe it was a 10-percent change. Well, Greece went ahead and, you know, raised the odds sharply, certainly, (inaudible) made the markets really worry about it.

And yet we aren't seeing the contagion, at least as dramatically as some might be concerned. And—and Greece has lost from this. Their leverage is less, and they—they are going to have a worse position as the bargaining table just from that, if nothing else.

MALLABY: The remaining leverage, just quickly to add to that, is the remaining leverage, I think is not financial contagion, it's sort of political contagion. And—and what I'm talking about there is the idea that, you know, if—if Greece really gets bad but they remain a member of NATO and through financial desperation, they are either going to have a military coup, they're going to form an alliance with the Russians, they're going to be open to Chinese assistance.

I mean, it's that kind of political worry, I think, which is the biggest incentive for Europe's leaders, the creditors, to try to keep Greece within the system. It's not financial contagion; it's political contagion.

KAHN: Sebastian, let me jump on that, because while I certainly fully agree with Ken, you know, this is not 2010, 2012, and the week has really put to rest a lot of our concerns that there would be broad—broad contagion.

I don't think we can rule out that we might get a second round or delayed contagion, and a lot of that does come through political channels. If we saw evidence that what's happening in Greece is strengthening rejectionist movements, for example, in Portugal or maybe to a lesser extent in Spain. You know, it recreates a so-called doom loop, concerns about the sovereign credit worthiness.

Losses have to be allocated, and indeed, I would rule out that we might see some, you know, further volatility (inaudible) which might bring these stories back to the table.

Now, if that happens, I personally think that because we have Q.E. as well as the European rescue operations, you know, we're not going to see it on sovereign debt. Where do you see it? You see it on the stuff the ECB doesn't buy—you know, equities, high-risk assets and the like. And so it plays out very differently than the past and, as Sebastian says, is very much going to probably be driven by politics as much as the economics in the first instance.

But I'm—I'm not ready to declare victory on this one.

ROGOFF: Oh, no. Absolutely not. But Greece's position is weaker than it was a week ago.

KAHN: Yeah. Good point.

IRWIN: So, you know, we've had this—this remarkable 60-year path of—of Europe becoming more and more united, not just a currency but—but—but trade linkages, labor market linkages. It's been a long process over many steps over many decades.

If—if Greece is—however precisely it works out, it's in some way removed from the rest of Europe. What's the cost of that? You know, is this stopping European unity in its tracks? Is it reversing it, or could this just be a bump in the road toward—for a continued integration of the continent?


KAHN: I'm probably the least qualified to answer this, but I'll start anyway.

I'm—I'm an optimist that says that a euro—Europe area without Greece, assuming this effort to get a deal fails, actually could be stronger and could well—could well actually provide some momentum for trying to make some further steps towards integration in ways that reduce the risk of further crisis.

But as we've been talking about, it very much depends on what the political response is in these countries. But I do think you could see more energy. I do think, ultimately, fiscal union has to be on the table in ways it hasn't been before so that these kind of—the shocks can be buffered more effectively. But that's obviously well down the road in Germany and a lot of (ph) other countries, but I think that this crisis may make the remaining countries more willing to take the next step.


ROGOFF: I strongly agree. I'll pitch in. What doesn't kill you makes you stronger, and Greece has absolutely been a weak link in really not playing by the rules; it probably never should have been put it, and it's always used as excuse number one, "We're not going to closer integration," or say, "Not doing Q.E.," earlier than they did.

So it certainly can go south in a hurry, this whole thing. It could well be also that Europe ends up stronger.

MALLABY: I see a very—this is Sebastian—I see a very kind of confused picture overall on Europe, because on the one hand, you know, Greece, if it does leave, ought to teach a lesson about the need for fiscal stabilizers to make a currency union work. But at the same time, the fact that Greece will default on larger amounts of debt owed to the official sector in the European creditor countries is going to make electorates in Germany, Finland, et cetera, even less keen on transferring resources to the indolent peripheral countries that they don't like.

And I think—so the—the—the politics in the creditor countries may make—you know, it both at once demonstrates the need for deepening in terms of fiscal transfer mechanisms and automatic stabilizers and also make—make those things harder to achieve.

And in the meantime, you've got the debate about Britain and its referendum and whether it will leave the European Union. I think it probably won't, but the debate will not edifying.

And so you—you—I think you have a confused picture.

IRWIN: And I think with that, we will—we will go to your questions.

Operator, can we get our instructions?

OPERATOR: Yes. At this time, we will 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 touch-tone phone now.

Questions will be taken in the order they're received. If at any time, you would like to remove yourself from the questioning queue, just press start two.

Again, to ask a question, you can press star one at this time.

We will pause briefly to compile a list of questions.

OK. Our first question comes from Andrew Mayeda with Bloomberg.

QUESTION: Hi. Thanks for taking my question.

This is a question for Rogoff. I—I just wanted to follow up on what you said about the IMF approach to—to Greece. Obviously, they've been heavily criticized for being—for—for pushing too much austerity on—on the country.

Can I just clarify your position on this? Because it seemed like you were saying that, in fact, the fiscal adjustment that was—that carried out in Greece wasn't as steep as perhaps has been perceived.

ROGOFF: Yeah. I mean, I think that...


QUESTION: Can you elaborate on that a bit?

ROGOFF: Yeah, the storyline that the Germans forced austerity in Greece, I think is very misleading in terms of the numbers. I have a Vox EU piece with Jeremy Bulow that lays this out.

So yes, if they start 3.5 percent a year in debt repayments in 2018, like the latest plan, then there will—it will indeed be true that debt repayments are forcing cruel austerity on Greece.

But, you know, from 2010 through mid-2014, vastly more money went into Greece than out of Greece, say, on the order of $8 billion euro, and that's not counting the banking support during a period where $100 billion euro left the Greek banks and the Greek banks were held up by the ECB. In fact, Greece got a very soft form of austerity compared to, say, what Asian countries face and many other countries without big supporters have had to face.

And it's not to say that in the future, there won't be a problem, but the austerity that they felt to date is primarily going from a 10-percent primary deficit in 2009 to, you know, roughly being in balance today.

And so that—that—I guess that's the point, that, you know, they—they've actually had—had a very soft program from that point of view, the austerity's driven by they were getting a lot of transfers through the credits, the transfers have shrunk and government spending has had to shrink. It's austerity from having to leave within your means.

That said, of course, the programs which expect them, in a deep recession, to make huge debt repayments are unrealistic. Yes, they should've written down the debt because that would've changed the morality tale, where, you know, French and German banks, in fact, got quietly bailed out and it's all blamed on the Greeks and that's wrong.

But, you know, again, the current government is promising less austerity. Somebody has to pay for it. They're not going to a big, immediate windfall out of cutting their payments with creditors. In fact, the deal that they've walked away from would've been pretty good for the rest of this year.

IRWIN: Thank you. Next question.

OPERATOR: Thank you. Our next question will come from Leslie Walton (ph) with Reuters.

QUESTION: Leslie Wroughton from Reuters. One question for Ken. How are you, Ken.

ROGOFF: Hi, Leslie.

QUESTION: Hello. The one is I've been kind of intrigued by the attitude of the U.S. towards this. I mean, I also look back and look at all the other crises in which the U.S., until recently when Geithner kept going back and forth to Europe to try to also help, you know, deal with this. But right now, we're seeing a kind of, you know, stand back attitude from them. Although the rhetoric between the White House, State Department, Treasury seems to be the same, there seems to be very little that they're—you know, that they're coming out to say that would change anything beyond that they think that Greece should stay in the Eurozone.

And then for Sebastian, I was wondering if you could comment a little bit more on the kind of geopolitical impact of what's been going on Greece, looking around in the region and whether you think countries like, you know, Greece could look more towards countries like Russia or anywhere else for more support.

KAHN: You want to start, Sebastian, then Ken?

QUESTION: Yeah, anybody.

MALLABY: So, I mean, just briefly on that. I mean, it's—clearly, as you probably have seen, Leslie, Tspiras has been to Moscow a couple of times. As I recall, there was one point where he showed up earlier in his leadership and essentially gave a press conference where he denounced western European sanctions on Russia over the Ukraine question.

So there he was, you know, posturing on geopolitics, taking a—you know, the kind of anti-NATO view when Greece is actually a member of NATO.

Now, I think, you know, you could see quite a bit more of that if the Greeks are in a situation where they've basically cut ties with Western Europe until they have nothing to lose from being anti-Western and pro-Russian or pro-Chinese. You know, this—it feels to me like the kind of (inaudible) government that would be quite happy to make those alliances.

I mean, the joke about the switch of finance ministers today. You know, you have one (inaudible) trained at Exeter University in Britain, exchanged for a supposed Marxist trained at Oxford in Britain. I mean, basically, this is a pretty left-wing crew.

Does it matter that a small country, smaller than Louisiana, is mouthing off and being anti-Western? Well, put like that, it doesn't sounds like it does matter, but I think that the lesson of the last 10, 15 years is that, you know, weak states can damage the stability of stable, prosperous states. And if it's a weak state, which is not only geographically within Europe but also inside European institutions, it's not an inviting prospect.

And so in a—and it's a (inaudible) that nobody at this point can specify. I think it does portend bad things down the road if Greece is allowed to descend further into economic chaos.

ROGOFF: I'm speaking on the U.S. Certainly, you know, throughout much of this, the U.S. has just wanted to maintain stability because the U.S. has been doing OK, possibly even well, and the last thing on Earth we would like in the United States is to have something throw, you know, a wrench in the works and, you know, cause the world economy to collapse. So I think the Obama administration certainly had an eye on that.

I think Sebastian's right, that political instability, you know, also is a concern now with this very left-leaning government. On the other hand, I'm not—you know, barring a takeover by a dictatorship or sort of a real communist takeover, I find it hard to believe that Greece, the Greek people will ultimately decide that Russia or China sort of is a better political partner than Western Europe. I think that as long as there's a strong democracy in Greece, that's just not going to happen.

IRWIN: Can I add just one point here, which is, you know, I do think, as Ken said, there's a kind of emphasis on stability in U.S.—on U.S. policymaking, maybe sometimes almost too much of a knee-jerk reaction of stability at all costs. Let's not have a crisis.

But I think the recent approach by the USG, and particularly with Treasury, also honestly reflects a lack of leverage, a belief that they're going to be able to influence the debate very meaningfully by getting out—by going out there and taking a strong position, so why do it. And that's very different from, say, 2010, when the president was very much involved in the original package for Greece.

KAHN: Thanks so much. Can we have the next question?

OPERATOR: Thank you. The next question comes from Trudy Rubin with the Philadelphia Inquirer newspaper.

QUESTION: Thanks for doing this. I'd like to pick up again on the geopolitical aspect. I'm wondering how Sebastian or any of you feel that a Grexit would impact the strength of extremist parties, whether from the left or the right in other countries in Europe, and whether it would revive in a more extensive way the talk of a two-tier Europe where some countries, not just Britain with a special arrangement but, you know, where the poorer countries would be better served by being out of the euro and still being part of Europe. And you go back to the long-ago discussions of, you know, the richer poor and the poorer periphery.

MALLABY: Trudy, it's a—it's a great question. I think that in some ways, though, the answer might be sort of the opposite to the one you were hinting at in the sense that if the Greeks do leave, I think they will pay a very heavy economic price. It's going to be chaotic and awful for at least several months.

And in terms of the prospects for Podemos in Spain or any other populist group in one of the other shaky European economies, it's going to basically make the populist option look less attractive to voters, not more attractive. So I think that is going to increase European cohesion.

I also think that there's not much sign of any appetite for extending the two-tier stuff. New countries that access—that become members of the European Union, I think pretty much have to sign up for ultimately eurozone membership. That's part of the sort of conditions. And therefore, the idea is to try to have as much as possible one track.

There are countries like Britain that are sort of grandfathered in, and that triggers a sort of whole different debate, but that's kind of about the—you know, the awkward squad amongst the older guard, not amongst—it's not about the newcomers and the terms on which they join.

So I think they're going for one track. The question, as I alluded to before, is whether that track is coherent because this crisis shows that a currency union in the absence of stabilizing transfer payments is extremely difficult to live with. At some point in the future, there'll be another country that runs a very big current account deficit because it's uncompetitive. That deficit will be financed by capital inflows which at first will be very easy to access because the currency union creates an illusion that it's safe to lend to the country with a deficit.

So the deficit country piles up all this debt, and then one fine day, people realize that it's too much and then you have another Greek-style crisis. And in the absence of, you know, let's say, continent-wide deposit insurance or unemployment insurance or all of the other mechanisms we have here in the U.S. to keep the dollar zone intact, I think the issue is that they're trying to create a one-speed Europe, but they don't have the political will to do what it takes to make that really stick in the longer term.

QUESTION: Right. Just—could I just follow up on that? I mean, do you seek the shock value of this changing anything, especially if there's Grexit or do you think German resistance is just too strong and you're simply not going to have a situation set up where, in the eyes of Germans, you'll be bailing out the profligate in the future?

MALLABY: You know, I think—I think the first response to Grexit in German and public opinion would be kind of serves you right. You know, you called us Nazis in your media; your prime minister said that we were, you know, blackmailing you; you took a lot of money from us and you did no reform. And that will be the narrative, you know, whether you believe it or not. That is, I think, the German view.

If you had a referendum, companion referendum, to the Greek one and you put it to the Germans—you know, would you like to give more money to the Greeks—I'm pretty clear that, you know, the vote would be no we don't. So I think that's the first order effect. And it would only be, you know, after some passage of time, if some of the really negative political risks were to, you know, come true that you could imagine in three or five years' time the German public swinging around and saying, oh gee, we made a mistake because now look. Greece has a miniature dictatorship or whatever it is.

I mean, I think it—that that's far out and it presumes a very negative political outcome in Greece.

ROGOFF: Let's not let France off the hook here. I mean, first of all, the bailout in 2010 was for the French banks more than anything when they didn't write down Greek debt. But French reticence about moving to a closer political and fiscal union has actually been one of the major obstacles, and if France, you know, changed its tune on that, I think you'd get a lot of progress. And in many ways, German strength is very much a reflection of French weakness.

The French economy is not that much smaller than Germany, although you would think it was an island when you hear the politics of Europe.

KAHN: Great. Next question please.

OPERATOR: Thank you. Again, if you would like to ask a question, you can press star, one at this time. Our next question comes from Kirit Radia with ABC News.

QUESTION: Yeah hi. This is Kirit Radia with ABC News. Just a couple of quick questions here. For those of us who are not sort of economists or focusing on this all the time, can you help sort of translate the ECB statement today sort of into English for all of us.

You know, when they talk about, you know, adjusting the haircuts and so on, can you sort of explain to us the significance of that?

And then this is sort of a related question. You know, we were discussing earlier about sort of the limited contagion we've seen sort of in the—in the short term, you know, for those, I guess, Americans who are sort of looking at this story and wondering how it affects them given what you've said, I mean, how would you sort of explain to them that this is something that they should be worried about?

IRWIN: Rob, do you want to take that?

KAHN: I'll start off.

So, the ECB have a whole range of facilities to provide liquidity. And they have what you might call conventional monetary policy facilities that they operate. But in addition, they have a facility called the ELA for emergency liquidity. And that is provided actually through national central banks, but of course it's backstopped by the ECB. And so it is meant to provide easier terms liquidity for directed purposes when there is a problem in financial markets or a special need.

When you want to do that—if you want to do that, essentially the bank accesses through its own national central bank that request. And they're able to, in a sense, go and borrow money from the European system of central banks. When they do that, they have to post collateral and it has to be a sufficient quality. And there has to be—that collateral has to be, at least at the day they post it, a premium in value over what they're borrowing from the European central banks. And that—that over—that extra buffer is the haircut.

And of course, the higher the haircut that is required by the European system of central banks, the more collateral this liquidity sucks up and the less—the less that's available to these banks.

Now, this has been pretty important because this ELA has been the major channel recently through which there has been liquidity provided to Greek banks. Essentially, over the last several weeks, dollar for dollar, the ELA has been used to replace deposits as they have fled the system. And so all those euros that were getting out of ATMs were essentially euros that were provided through the ELA over the last several weeks.

To do that lending, there is basically two judgments every day that the ECB is supposed to make. One is that the banks are solvent; that—because you're only supposed to provide this special liquidity to solvent banks on good terms, sort of as a lender of last resort.

And, look, an objective view is these banks are deeply insolvent right now. But up until now, in order to facilitate (inaudible), doesn't want to be the one putting the knife in, they have not been willing to make that judgment of insolvency.

The second piece was that there's adequate collateral and that the collateral is of appropriate value. And again, they've not wanted to say that this collateral, which—more than half of which is Greek government debt, is not worth so much anymore. But today, they basically took a first step down that path of saying that because of what's going on in markets, because of the breakdown of the negotiations, they will require more collateral for future lending.

Now, I think, and they don't give us the exactly numbers, but it looks like they finally calibrated it so this would not force any bank kind of into formal insolvency. It's meant to be a signal more than a direct move. But it would mean that in normal times, if the banks were ever to try to reopen, they would need a lot more collateral in order to continue to access these funds.

It is a decision that will have to be taken day to day. And so each day they have to address it. But it is a critical—if they were to halt this program either by saying the banks are insolvent or by raising haircuts to prohibitive areas, you would in a sense force immediately a recognition of insolvency and a closing of the banks.

IRWIN: So that's actually very helpful. So before we get to the other question that I had, you know, if—if—there was a report late last week about them accessing some of the deposits from—from I guess ordinary Greeks, of their money in the banks to use as collateral. Is that something you think we're going to end up seeing at some point or what?

KAHN: I think so. Certainly, after Cyprus, it has been sort of I think understood and part of the toolkit, if you will, that in cases where you need to recapitalize banks, that you may end up taxing deposits. And frankly, there's very little capital left in these banks. There's really not much other choice.

I mean, the Greeks now are struggling to think of ways to reopen the banks. And that means both getting liquidity and getting capital in. If you look at the capital they report, until recently they said they were well capitalized. But if you actually look at it, a lot of it was paper capital. It was the promise of future profits and tax credits associated with that and the like.

The actual capital in these banks was not all that high. And what we've seen over the last month is a massive increase in nonpayment on loans. Why should I pay the loan if I think the bank won't be around much anymore? Why should I pay the loan if I can't access my own accounts for food? I'll use that money instead for other purposes.

And so, you know, right now you—if you were to—if you want to reopen the banks, you're going to have to find some way to square those books. And it really probably does come down ultimately to taxing deposits.

I do think this sort of idea they floated last week has a certain populist appeal to this government because it goes after very high-income earning Greeks, many of which presumptively don't pay a lot of taxes. But I do think, you know, we can see that that can be very destructive to the bank's ability to become credible again and get customers. So I think they've got to be pretty careful about what they say.

But I think the bottom line is any—if it's a workout within the eurozone, it probably would involve a haircut and we can look to Cyprus for an example for that. If it ends up being an exit from the eurozone, depreciation, default and then the government trying with their new currency to find ways to bring the banks back, they probably again would have to haircut those deposits.

IRWIN: And why...


ROGOFF: Yeah, it all comes to the same thing. It's absolutely routine in these situations. Argentina did it, where they don't have any money. The government doesn't have any money. And they either give a haircut to depositors as in Cyprus, or they start a new currency that's worth less and tell the depositors that's what they can have. So, you know, there are very few moves that they have.

And just to reiterate something else Rob said, I mean, basically if you had a run, people were going to their ATMs in the U.S., Y2K2, the Federal Reserve can just flood the system with bank notes; making loans as necessary. The Greek central bank doesn't have the independence to do that. It can only do what the ECB lets it through these, you know, various, you know, mechanisms.

And so once the ECB says, "OK, that's it," then they don't have a way to refill the ATM machines.

IRWIN: That's actually very helpful. I wonder if just you could briefly—I know I'm taking up a lot of time—just answer the other question on how this will—I mean, if you're trying to explain it to somebody sitting in sort of, you know, Iowa in the U.S., you know, how this will affect them eventually? You know, how would you say that?

ROGOFF: If it blows up. I mean, you know, Sebastian talked about how there could be political contagion. Who knows? You know, it's still a very—it's contained. It appears to be contained, but it's certainly not settled. That could take years.

IRWIN: Great. We are near the end. I wondered if—if each of our panelists would—would have just a brief moment of thinking about what they're looking for next. And what, not just in this next couple of—next few hours, next few days, next few months, what are the things you're watching? What are the things you're hoping to see and expect to see as this moves forward?

Sebastian, what do you have your eye on?

MALLABY: I guess, you know, if we just—I mean the fast-moving Greek drama will be mesmerizing I think for the next, you know, week or two or whatever it takes, to either get a deal or not get a deal. But beyond that, what I'm looking for is sort of any sense that the crisis—you know, you shouldn't waste a crisis, and that it could be used as a springboard for some of the structural reforms to the way the eurozone works that I believe are necessary to make it sustainable in the future.

IRWIN: Rob, what are you focusing on this next few days, weeks?

KAHN: I'm focusing on what happens domestically. While we all like to pay attention to these big external meetings and external debt payments do, I think what ultimately will drive this will be the domestic financial conditions. Tsipras has made promises that are inconsistent. That's going to become apparent in coming days. And how people respond to whether it's lack of money in the ATMs, IOUs that are worth a fraction of their face value and the like; and the sense of promises not kept I think ultimately will be decisive where we're going and probably on a much quicker timeline than people expect.

I think the idea of an extended sort of period of Grimbo, if you will, is going to be hard to sustain.

IRWIN: And Ken?

ROGOFF: Well, I think the ball is in Greece's court, not Europe's. They've said no to this approach. They have to find an approach that they think will work. And this includes structural reforms that, you know, they want to do.

I will say structural reforms really only work when the country proposes them and the creditors say fine. And they've just never reached that point. And Greece has to come up with something. Tsipras said this won't work. And he has to propose something that will.

IRWIN: With that, I'm sure we will all be paying very close attention and watching this remarkable story unfold.

Thank you very much to Robert Kahn, Sebastian Mallaby and Ken Rogoff and to the Council on Foreign Relations for hosting this.

Thank you, everyone.


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