Clive Crook: Greek deal leads Europe down road to disaster
Clive Crook is an editor of the Atlantic Monthly, and writes for the Financial Times as well as Bloomberg among other publications. This material is summarised from a Bloomberg article.
Crook thinks that the Greek bailout deal is simply a holding action one that does not deal with the larger confidence issues facing Europe. The losses to private lenders will be about 75 per cent of the value of their holdings as the face value of Greek bonds is cut by about half and a low interest rate will be paid.
Providing enough private lenders go along with the deal new official loans will be provided that will service the Greek deficit and upcoming payments due. The loans involve various subsidies and a low interest rate. The IMF is supposed to take part as well but it is not clear how.
Clive notes that if too many private lenders reject the plan the deal must be changed. He notes too that the Greek government may have problems passing the required legislation. This includes drastic cuts to the minimum wage, make debt-service payments into an account that will be monitored externally. Also the Constitution has to be amended to make debt repayment the first priority. Finally the government must accept that a team of EU officials monitor public accounts. The end of democracy in Greece and rule by financial capital--my words not Crook''s!
Clive suggests that if Greece postpones changes such as lowering wages and delays privatisation then dependence on official loans will grow. I thought that if Greece were to do this it would not even get the loans in the first place.
The EU has chosen to keep muddling through without ever doing enough to resolve the problem. Clive admits that so far unilateral default has been avoided. Clive thinks that perhaps the rational principle behind the EU approach is this: "Let's build this manageable problem up into a crisis capable of vast destruction that we might be unable to control. That will create the fear needed to force some real improvements in economic policy."
According to Crook creating this panic turns a liquidity problem (difficulty in borrowing) into a solvency crisis, as government debt balloons. The EU policy seems to be to maximize panic. Even many EU officials believe the bailout plan will not work and that Greece may default maximizing panic.
However Crook thinks that the EU has no plans to deal with this contingency of the deal not working even though it could bring disaster. Clive thinks that the Greek economy is small enough that the rot could be stopped. Greek debt should simply be written off. Until Greece can start growing again and get a surplus that would allow it to borrow on the private market Europe should provide financing. Greece should continue using the Euro rather than reverting to the drachma.
European banks need to be recapitalised and the EFSF increased. It may even be necessary to do in Ireland and Portugal something similar to what he recommends in Greece. I find it doubtful that European Finance capital is willing to take a haircut of the proportions Crook suggests. No doubt there will be arguments that the Crook policies involve a moral hazard by encouraging reckless debt with no appropriate punishment. To avoid such a moral hazard one should cut wages, pensions ,, health care, education and sell off state assets at fire sale prices. For more see the full article.
Eventually the working class will be suitably weakened so that Greece will be competitive in providing telemarketers with Greek accents to service global corporations.