- To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.
Amid widespread speculation that Greece will need a second European Union-sanctioned bailout, Standard and Poor’s downgraded Greece’s credit rating (CNN) June 13 from B to triple-C, just two notches above default. But a new bailout--to be hashed out at a June 20 meeting of EU finance ministers--is not likely to require private investors to accept losses, as Germany has wanted, says Iain Begg, a professorial research fellow and expert in the political economy of EU integration at the London School of Economics’ European Institute. Begg argues that the European sovereign debt crisis will spur the development of new governance mechanisms that will ultimately deepen EU integration. Begg also points out that the United States, which has been slower to understand the scale of its own problems, will soon "have to do the things that Europe is already doing."
What routes could the EU take in providing Greece with a second bailout?
It could be a repeat of the kind of package issued last year, which would comprise IMF funding, plus resort to the European Financial Stability Facility (EFSF) and the European Stabilization Mechanism. It was an ad hoc rescue last year, that’s one route. The second route would be to change the proportions for more or less from the IMF, more or less from the euro-area members, as opposed to the whole of the European Union. And the third would be some attempt to involve the bond holders, but there seems to be a pretty strong opposition to that. I’ve just been listening to Jean-Claude Trichet talking about it and he was adamant that the bond holder route is one that would be far more damaging than any good it might do at this point. So there’s reasonable ground for ruling out bond holder participation.
Why is the ECB so opposed to the German plan of involving private investors? What does it have to lose if Greece defaults?
One explanation is that the European Central Bank is not able to accept as collateral the bonds of the government, if Greece has defaulted. That’s probably a technical answer. Bur the more worrying concern is that it triggers some sort of systemic effect, and if this systemic event is triggered there’s no knowing where it leads, as we saw with Lehman Brothers in 2008. That’s the[concern] in the back of the collective ECB mind.
Conversely, why is Germany so adamant about forcing the participation of private investors in a bailout agreement?
A reason could simply be that they have to accommodate their domestic interests, which includes the specter of the German constitutional court and public opinion, which is pretty hostile to the notion that hardworking Germans are bailing out [Greeks]. So, there’s a bit of public misapprehension going on, but which nevertheless feeds into the political process that the Germans have to manage.
So then what should be expected at the June 20 meeting of EU finance ministers?
I expect we will see the consolidation of [the decision that] appears to have already been reached among the finance ministers, which is to extend [aid] to the Greeks and probably to amend the existing facilities. So, increasing it from the €110 billion that it was already calibrated at to some higher figure, maybe 20, 30, or even as much as €50 billion higher.
Won’t the German-led finance ministers, rather than the ECB, have the final say on whether private bondholders are forced to take losses?
Yes, but Germany is only one of either 17 or 27, depending whether you are talking about the euro area or the EU as a whole. Yes, Germany is the biggest, first among equals, in this regard. But the Germans could not do it on their own. You would find there are a quite number of other countries hostile to what the Germans are after. So it’s the usual political wrangling at the European level . . . Probably the southern European countries [are opposed to the German scheme], and I am not really sure what France’s position is. France may, in time, want to support the Germans in asking for bondholders to contribute. But they may see the risks now as being far greater. Not least because French banks are among the most exposed to the Greek debt, far more than German banks.
And if the finance ministers were to reach some sort of conclusion next week regarding private investor involvement, how do you see that affecting the eurozone?
The question would be how it was done. It still is pretty probable that it won’t happen. The how could be either by rolling over existing debt, extending maturities and easing the terms of it, or it could be the write-down. The write-down is far more dramatic, because that has repercussions for the balance sheets of the banks that have debt. So there would be strong resistance to write down that debt, whereas by extending the maturity [a rollover], they can gain. Everybody can play and pretend nothing much has happened by saying, "Instead of the Greeks paying back in two years, they will pay back in four years; instead of paying an interest coupon of 5 percent, we’ll let them off with 3 percent." That’s the way in which you massage it such that you don’t cause the kind of financial tsunami everyone fears.
But, at the end of the day, you don’t think even this maturity extension, or debt rollover, is likely?
No. There’s been some speculation in the press that the ECB is playing one game in public just to enable it to look hard and then it will crumble at the last minute. But I don’t think that that is in the character of the ECB. I think they would stick to the preferred position, which was expressed [by Trichet].
In more general terms, what does the Greek debt situation and the larger European sovereign debt crisis mean for the future of the single currency zone? Is the euro at risk?
No. Those who say the euro is at risk are either looking at it from the wrong side of the English Channel or the wrong side of the Atlantic. They don’t understand the scale of the claim that has been made to it. It’s also a constitutional point, which is that there is no very clear exit route from the euro, so it’s not really an option for a country like Greece to say, "We decided that we want to get out and that we’re doing it tomorrow." There isn’t an obvious way of doing it; in much the same way that there is no obvious way of California exiting the dollar. Then, there’s the fact that if a country like Greece were to exit the currency, it would have to be alert to the fact that all their debt in euros would certainly become that much more expensive, because any successor currency would be bound to plummet. They would destroy their banking system, and they would embark on several years of pretty hard labor, in much the same way that Argentina did in 2002.
What are the larger political implications of the debt crisis on the EU, in terms of the "European project" that has coalesced so much over the past twenty years?
One is almost paradoxical, which is that it’s been an opportunity for what in the jargon is sometimes called the "deepening of the EU." We have seen in the past year the putting in place of more extensive economic governance mechanisms. There have been calls for a European level finance ministry, or equivalent. There have been calls in addition for the establishment of euro bonds, which would be equivalent to American T-bonds [Treasury bonds] as a means of financing the debts of governments collectively.
There’s also been the proposal, which looks like it’s going through, of having an explicit crisis resolution mechanism in the future, which will involve haircuts [the difference between the actual market value of a security and the value determined by the lender] from bold holders. And there’s a general sentiment that the Europeans can no longer be cavalier about the rules. So, one political direction has been this deepening of governments allied to the comprehension that they can’t muddle through to the extent that they did in the previous decade. Now the other is, maybe in some countries, to cause an upsurge in euro skepticism or euro resistance. It’s no surprise in a country like Greece, the Europeans coming in are seen as the "bad guys." In Ireland, less so. In Portugal, there’s almost the reversal of the usual procedure, where the IMF is perceived as the" good guys," despite the IMF’s reputation from the previous rounds of crises. So we’ve seen some loss of sympathy, to put it mildly, toward the European level, and yet a reliance on it. So there is this second paradox, which is that the countries that are able to take advantage of the euro’s mechanisms, while bemoaning the fact they have to do so, are better off because they have the opportunities to avail themselves of what the EU has to offer, including the euro area.
What does the European debt crisis mean for the global economy, and specifically for the U.S. economy?
Although so much of the focus has been on Europe, the collective European fiscal deficit and the collective European public debt is lower than either that of the United States or Japan. The U.S. deficit is 9 to 10 percent of GDP. In Europe [the deficit] is projected to be 4.5 [percent of GDP] this year. There’s been a focus on Europe because some of the markets see the risk of fragmentation of the euro area and an inability to deal with it. But from the U.S. perspective, what is significant is that Europe is dealing with the problem, and that even risks putting more of a focus on the relatively slower appreciation of the scale of the problem on the U.S. side--and potentially having an impact on the bilateral exchange rate. In other words, the United States pretty soon is going to have to do the things that Europe is already doing.