The Greek tragedy is not yet over. At various intervals, we see the damsel in distress about to be rescued by an intrepid saviour, but then there are roadblocks in the path of the saviour and we wait for the next episode of the tragedy.
In the meantime, back at the IMF, after all the sound and fury, the BRIC countries could not deliver a non-European alternative to Lagarde. In the penultimate stages, the US patched up a deal with the EU so that Hillary Clinton gets the World Bank job when Zoellick gives it up and Christine Lagarde got the IMF job. It may be gender friendly, but it stinks to high heaven. Though, to be fair, we have had some openness about the selection procedure. Better luck next time, I suppose.
Why should Hillary Clinton want to be the World Bank president rather than, say, be appointed a judge to the Supreme Court is beyond me. But then she may never get congressional approval for the Supreme Court but Congress does not give a damn about the World Bank and who leads it.
Christine Lagarde?s appointment will make the settlement of the Eurozone crisis more difficult than not. Dominique Strauss-Kahn had already broken IMF norms to advance the loan to Greece and IMF will be stretched further if more money has to be given.
The Greek loan is unfinanceable in IMF terms. Greece will not be able to return to the international markets in 2012, which would be an implicit condition for such loans.
With a 160% debt-to-GDP ratio, even with a 5% interest rate, the burden of interest payment alone would be 8% of GDP. Then there is the principal sum to be paid back. (India has a much higher debt burden?a third of government revenue is paid as interest charges?but then India?s debt is held mainly by PSU banks so the principal never needs to be paid back.)
Greece may be in austerity mode for 30 years at least, at this rate. A generation, if not two generations, faces bleak prospects. Of course, many young people will migrate rather than stay, which will make the matters worse. There is already a capital flight and much buying of gold by Greek households. So the economy will deteriorate as long as Greece stays on the orthodox finance path.
There is, of course, the Iceland alternative, as I have said before. If Greece renounces its debt, creditors would have to come and renegotiate the repayments. It may even be able to do so staying within the Eurozone. If not, it should quit, though no legal ways exist for a country to exit the Eurozone. An exit will have severe effects on output, say a 10% loss in the first year and maybe even for two years. But the new currency?new drachma?will depreciate heavily and eventually boost Greek exports. Two or three years? misery can be exchanged to escape 30 years? slow torture.
There are precedents for such a renunciation in pubic and private spheres. Argentina has done so recently and creditors had to renegotiate how much they could recover.
Lehman Brothers went bankrupt in September 2008. And, just about now, the creditors are settling for around 20 cents in the dollar.
But the Eurozone countries, especially France and Germany, who are the two biggest members, will not easily allow any reneging of the debt. They have themselves broken the discipline of the euro several times in matters of budget deficit etc. Indeed, Finland, Slovenia and Estonia are the only three euro countries who fulfil all the conditions for belonging. So the Eurozone is not a disciplined army.
But Greece is small and the bullyboys France and Germany are big. So Greece may have to suffer.
There is gross injustice to this orthodox view. The mess in Greek national accounts arises from years of tax avoidance and evasion by the rich Greeks, early retirement with generous pensions by public sector workers and a lot of falsification of accounts. Ordinary citizens will now have to pay direct and indirect taxes, suffer lower wages and salaries to satisfy orthodoxy. Why not just tell the creditors who lent the money that they should have known better and they should share in the burden?
This won?t happen, of course. When the banks went bust, citizens had to rescue them, i.e., pay off their bond debt and help shore up their equity values. But when it comes to collecting their debts, the same banks will behave like Scrooge.
The G20 should initiate a debate about such asymmetries in the debt market. One of the attractions of Islamic Finance is the idea that debtors and creditors should share in good and bad times whatever the outcome is. This makes every bond an equity. The idea can be divorced from its religious moorings and used to reform the sovereign debt market. This is the time for India and China to act.
The author is a prominent economist and Labour peer
