Eurozone ministers: What is the fuss about?

On 14 June, the Eurozone ministers could not agree on the form of the second bail-out package for Greece. The contentious point was the role of the private investors in it. Germany insisted Greece’s lenders should swap their bonds for new ones with extended, seven-year maturities. This would allow plenty of time to the Greek government to implement the necessary reforms in order to lead the economy out of the recession and in a path of growth, which will allow it to borrow from the markets.

This was not accepted by the European Central Bank, the European Commission and France. The reason was that although Brussels would call this bond-swapping “reprofiling” of loans, the credit agencies would interpret this as a pure and simple default. The ECB, both in the words of the current President Jean-Claude Trichet as well as the likely next head of the European Central Bank, Mario Draghi, stood firmly against anything which could be seen by the markets as a default. It claims this would cause panic (see US 2008 collapse of Lehman Brothers) and have serious repercussions for European banks. On 15 June (day of general strike in Greece), Moody’s announced that it might review the ratings of France’s three largest banks (BNP Paribas, Societe Generale and Credit Agricole) because of their exposure to Greek debt.

Instead the ECB was promoting the so-called “Vienna initiative”. This is an agreement which had taken place in order to contain the debt crisis in Eastern Europe in 2009. In effect, foreign banks had agreed not to cut their exposure to the region and run, and thus there was no spread of the  financial contagion in Central and Eastern Europe. In this scenario, any bond-swapping is purely voluntary.

The agreement among Eurozone ministers is now on the way. This was partly facilitated by the IMF’s decision to give the next payment of Greek aid of €12 billion on 29 June, on the basis of a “promise of future EU funding rather than any concrete commitments” (BBC news).

The question

In October 2009, the Socialist party (PA.SO.K) got elected with 43.9% of total vote and on a platform of economic reform. A characteristic (populist) motto of the socialists before the election was “Money exists”, referring presumably to the amount of public funds which would be available after the socialist party would come to power and “cleanse” the economy of tax evasion, corruption and mismanagement. Prior to the elections, George Papandreou was campaigning in an Obama-style professional-yet-friendly look (he even proclaimed a 100-day governance period after he got elected) and his major TV election commercial was one where he was sitting in front of a desk, with his shirt sleeves up and he said “Let’s go” in a voice full of determination. Presumably, this motto was devised to convey the message of “Let’s get to work”. A year later, Greece was in a dire financial situation, was receiving financial help from the IMF and the European Union, while at the same time implementing painful austerity measures. What happened?

The IMF

The IMF (International Monetary Fund) is an international monetary institution, which was set up after the end of the Second World War. It was conceived at the Bretton Woods Conference which took place in New Hampshire (USA) in July 1944 and it  began operations in March 1947. Originally, it started with 29 member states, but there was a great expansion of its membership during the 1950s and 1960s. The IMF’s initial aim was to promote international economic stability and oversee the international monetary system i.e. the system of exchange rates and international payments through which countries trade with each other.

This aim was also compatible with the “par value system” (also known as the Bretton Woods system) which meant that the countries that joined the IMF up to 1971 agreed to keep their exchange rates pegged at specific rates. In particular, the member countries agreed to keep the value of their currencies pegged in terms of the U.S. dollar and the United States agreed to retain the value of the dollar pegged in terms of gold. These rates could be adjusted only to correct a “fundamental disequilibrium” in the balance of payments, and only with the IMF’s agreement. This system collapsed in 1971, when the U.S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold.

Since the 1970s the IMF took on a new role, that of a lender to governments that could not borrow from the international markets. However, as it usually goes with borrowing and lending, the IMF lends funds under specific conditions. The measures that the IMF usually requests of the government-borrower, also known as Structural Adjustment Policies (SAPs) include trade liberalization, currency devaluation, privatization, reduction of government deficits, reduction of the role of the government in the economy, all with the aim of attracting FDI (Foreign Direct Investment) i.e. long-term capital investment from multinational companies. Most of the time, the results are a decrease in the provision of the provision of health care services and education (also known to economists as merit goods), a fall in real wages, and an increase in unemployment. To find out more about the IMF, you can visit its website. For a critique of the IMF, you can visit Naomi Klein’s website.

Greece

Greece is a small country at the southeast corner of Europe. Its population amounts to almost 11,000,000 people according to the latest census. It is not a rich country. Its GDP per capita is $28,000, according to the latest Economist publications, bringing Greece to the 29th position of the world economies.  Greece was under the rule of the Ottoman Empire for almost 400 years (1453-1821)  and its culture often resembles that of Turkey, the Middle East and Northern African countries rather than that of the northern European countries. However, it has been historically considered as part of Western Europe, thus being grouped together with rich European countries like France, Germany and the United Kingdom. To find out more about Greece, you can visit wikipedia, the CIA Factbook, or the BBC website.