ECB Announces 750 Billion Euro Pandemic Bond-Buying Program
Thursday, March 19, 2020 01:16 AM
By Jana Randow
Decision taken in emergency meeting Wednesday evening
Policy makers will consider raising self-imposed QE limits
The European Central Bank launched an extra emergency bond-buying program worth 750 billion euros ($820 billion) to calm a worsening financial crisis and protect the economy through the coronavirus epidemic.
The decision in an unscheduled meeting on Wednesday evening came less than a week after a policy session in which officials agreed to pump more liquidity into the financial system. Despite that step and stronger measures by other central banks, markets are in freefall, prompting a new set of measures.
A temporary asset purchase program to buy public and private-sector securities, worth 750 billion euros and running until at least the end of 2020
Program will cover all assets eligible under current quantitative-easing program, and will be extended to commercial papers of sufficient credit quality
Greek government debt will be included in the program under a waiver from current rules
Collateral standards will be eased by adjusting some risk parameters
Program will continue until ECB judges the crisis phase of the pandemic to be over, but not before the end of this year
The ECB will consider raising its self-imposed limits on QE holdings, and stands ready to increase the size of its asset purchase programs
The euro and U.S. equity futures rose after the stimulus measures. S&P 500 futures reversed losses and the single currency edged higher to trade around $1.0950.
Investors are pushing up bond yields as they fret about the cost of the massive fiscal response to the pandemic. Italy, which already has the euro zone’s second-biggest debt burden after Greece and is the worst-affected by the disease, is especially hard hit.
ECB President Christine Lagarde inadvertently worsened the problem last week when she said the central bank’s job is not to close the spreads between safer and riskier government debt yields.
In its statement, the central bank said it “will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.”
The newly identified virus that emerged late last year in the central Chinese city of Wuhan has quickly spread worldwide, with the number of infections topping 100,000. The contagiousness of the so-called coronavirus, which causes a lung illness dubbed Covid-19, has health experts worried it could become a pandemic to rival some of the most devastating in recent decades. Meanwhile, the outbreak is causing turmoil in the global economy and financial markets.
(This story updates with new infection toll and fresh details on what authorities are doing in section 10 and economic impact in section 12.)
1. What makes this virus so worrying?
It has been described as “insidious” because many infected people are well enough to go about their daily business, unwittingly spreading it to others. As of March 3, the fatality rate was about 3.4% based on globally reported cases, the World Health Organization said. Such numbers are unreliable in the early stages of an outbreak, however. Some disease-modeling experts project as many as hundreds of thousands of people are actually infected, most of whom don’t even know they have it. One study published Feb. 10 estimated a mortality rate of 1% once all cases, including those with no or only mild symptoms, are counted.
2. How does this compare with other outbreaks?
A related coronavirus killed 9.5% of patients in the 2002-2003 epidemic of severe acute respiratory syndrome, or SARS, and another known as MERS-CoV has led to death in 34% of the 2,499 cases recorded since 2012. In those outbreaks, however, the viruses didn’t transmit from one person to another as efficiently as this new one appears to do. Certainly, they didn’t spread as widely as fast. In the worst pandemic in recent history, an estimated 50 million people died in the 1918 influenza pandemic that had a case-fatality ratio of about 2% but infected as much as a third of the world’s population.
3. What does the virus do?
Symptoms begin to appear on average five to six days after infection. Infections appear to cause a mild illness lasting about two weeks in children, adolescents and younger adults in most cases, and potentially more severe disease lasting three to six weeks in older people. Frequently reported early signs are fever, dry cough, tiredness and sputum production. In severe cases, studies suggest the virus invades cells in the lower respiratory tract, causing difficulty breathing and the inflammation and congestion associated with pneumonia. In an early study, more than a quarter of hospitalized patients developed a complication known as acute respiratory distress syndrome.
4. Who’s most at risk for complications?
It appears to be the elderly and those with other serious health issues. Many of the fatalities have been in patients with underlying illnesses such as cardiovascular disease. A Chinese study of 72,000 cases found most deaths occurred in patients over 60 years old. Of all confirmed cases, 81% were mild, 14% were severe and 4.7% critical. The last pandemic, an outbreak of a new strain of H1N1 flu in 2009, infected an estimated 61 million people in the U.S. alone and may have killed as many as 575,000 people worldwide in the first year it circulated — with about 80% of them younger than 65, according to the U.S. Centers for Disease Control and Prevention
5. How do people contract it?
By coming into contact with virus-containing droplets that are emitted when an infected person coughs or sneezes, according to the WHO’s first comprehensive report on Covid-19. These droplets can be transferred directly to someone else in close proximity or via hands and surfaces. How long it survives on surfaces is still not known, but preliminary studies suggest coronaviruses may remain infectious from a few hours to a few days. Simple disinfectants kill it. There’s a theoretical risk the virus can spread through feces or fartherthrough the air in tiny particles known as aerosols. People who are still incubating the virus and show no symptoms may spread it. Health authorities are concerned about what’s known as community spread, where the virus begins circulating freely among people outside of known contacts with other patients.
6. How contagious is it?
Epidemiologists try to gauge contagiousness by estimating the number of additional people a person who is infected is likely to infect. That measurement, called a basic reproduction number or r0 (pronounced “r naught”), is one indicator of how difficult an epidemic is to control. A study of an outbreak aboard a cruise ship estimated that the r0 for Covid-19 was 2.28 during the early stages. That would make it more infectious than seasonal flu, which has an r0 of about 1.3 and killed an estimated 61,000 people in the U.S. in the 2017-18 season.
6. Could warming weather help combat it?
The viruses responsible for influenza spread more easily during cold weather because they survive longer in cold, dry air. But there’s no evidence to suggest the Covid-19 virus would be affected by weather.
7. What’s a coronavirus?
Coronaviruses are named for their crown-like shape. There’s a large family of them, responsible for diseases that range in severity from the common cold to MERS. Some transmit easily from person to person, while others do not. The WHO says that new strains emerge periodically around the globe, and several known versions are circulating in animals and haven’t infected humans.
World’s Best Stocks of 2019 Are Already Europe’s Worst This Year
Greek stocks wipe out about a third of last year’s advance
Concerns grow that coronavirus may hit tourism industry
By Tugce Ozsoy and Filipe Pacheco(Bloomberg) —
Investors who made a killing betting on Greek stocks last year are rushing for the exit amid concern the spread of coronavirus could dent the country’s tourism industry.The exodus from the Athens Stock Exchange has already wiped out about a third of its world-beating advance in 2019 and dragged the index down more than 10% this year. It’s now the worst-performing equity gauge in Europe. On Wednesday, a 38-year old woman was hospitalized in the northern city of Thessaloniki, the first confirmed case of the virus in Greece.
While the trajectory of the epidemic remains uncertain, the knee-jerk reaction for investors who flocked into Greek equities last year has to been to take some risk off the table. Tourism and travel receipts account for a fifth of the Mediterranean country’s economic output, according to latest data from the World Travel and Tourism Council.
The Athens stock index posted a 49% surge in 2019, fueled by one of the most attractive valuations in emerging markets and the promise of tax cuts and pro-business policies by a new government. Greece still faces major challenges, including a weak banking sector, high unemployment and a large stock of public debt, the European Commission warned on Wednesday.
“Given the performance that we had last year, it is pretty easy to lock in some profit taking,” said Dimitri Dardanis, the head of institutional equities at Piraeus Securities in Athens. “You can’t escape what is happening elsewhere. You have to ride the wave and, at the moment, there is not much to do.”
The Athens bourse was the second worst-performing equity index in February among 94 gauges tracked by Bloomberg, outstripped only by Lebanon. The losses this week were led by Piraeus Bank, which retreated 16%, followed by Coca-Cola HBC, Titan Cement International SA and Hellenic Telecommunications Organization SA.
“The fact that this is an unfolding story that people are being surprised by, it is not easy to predict what it is going to do to tourism,” Dardanis said. “Globally there is an issue that people do not want to fly. When that is going to impact us is still unknown.”
(Bloomberg) —European Central Bank policy makers from two of the euro area’s biggest economies said governments must shoulder most of the burden for rebooting economies if the coronavirus has a deeper impact on growth.
France’s Francois Villeroy de Galhau and Italy’s Ignazio Visco were speaking at the Group of 20 meeting of central bankers and finance ministers in Riyadh, where the threat from the outbreak was front and center.
“If we don’t see a rapid V-shaped effect there must be some decision to act in a coordinated way,” Visco told Bloomberg on the sidelines of the G-20. “We must use fiscal policy because monetary policy is already very very accommodative around the world, and it’s uncertain that we can do more on that.”
Villeroy said delegates at the meeting spoke a lot about daily monitoring and contingency plans, even if the central scenario remains for now a V-shaped recovery.
“There was the feeling that if the policy mix needed to be strengthened in the face of coronavirus, it couldn’t be only monetary policy. There is still monetary space but it is more limited than before,” Villeroy told Bloomberg. “It is even true in the U.S., so therefore questions of fiscal space and structural reforms are back in force.”
Trade has been severely disrupted by factory closures in China’s Hubei province, the epicenter of the outbreak, and companies from Apple Inc. in the U.S. to Europe’s largest tiremaker Michelin have warned that profits could suffer.
The blow is all the more harsh as G-20 delegates otherwise had reason to see the world economy turning a corner. Villeroy noted that “nobody seriously fears a recession,” and the U.S. -China trade tensions that dominated previous meetings have declined.
“If there is one concern about the economy at this G-20, it’s coronavirus,” he said.
Visco said the world economy has two quarters to bounce back from the coronavirus hit before policy makers should unleash coordinated fiscal stimulus. Back-of-the-envelop calculations by finance chiefs at the Riyadh meetings suggest the outbreak could knock by 0.1 percentage point off global growth this year, Visco said.
The hit to the Italian economy could be as high as a quarter of a percent, reflecting the economy’s integration into global value chains and its reliance on tourism.
“I’m already worried now but if we don’t see a material improvement by September, I’d be really worried,” Visco said. “You need two quarters to realize and understand.”
Visco lent weight to his argument by warning there’s a risk of a “mini de-globalization” if pessimism and fears about further supply-chain interruptions leave the economy suffering for a protracted period. “This shouldn’t be ignored.”
Visco said central bankers haven’t discussed joining forces to deliver a coordinated monetary-policy response. The ECB’s deposit rate is already at a record-low -0.5%.
“If there’s a need for liquidity assistance, it can be provided through various measures like swaps — of course,” he said. “If you think about interest rates, it’s much more complicated. There are limits which are not explored.”
On climate, Visco said he saw “reasoned considerations” at the meeting in Riyadh that it’s important to pay attention to the risks global warming can pose for financial stability.
“What looked quite new two years ago is now almost a G-20 consensus, so this is a very significant move,” Villeroy said.
The European Union‘s first high-level meeting since Brexit risks ending in acrimony, with member states at odds over how to cover a gaping budget hole caused by the loss of British contributions.
The extraordinary summit in Brussels to nail down a seven-year spending plan kicks off on Thursday afternoon, but no end time has been set and diplomats fear negotiations could drag on through the weekend. Even then failure remains the likeliest outcome.
The trillion-euro budget is a cornerstone of EU policy that lets farmers compete against imports from the developing world, helps poorer states catch up with the rich ones and underpins projects that bind the union together. But it’s also a lightning rod for the tensions running through the bloc and after three years of uncharacteristic unity during the Brexit negotiations, passions are now running high.
“There is a way forward to find an agreement during this summit,” French President Emmanuel Macronsaid on his way into the meeting, adding that he would spend as much time as needed to get an ambitious agreement. “This pathway can take a few days, a few nights, I am ready.”
The outcome of the battle will signal if Europe is prepared to spend more collectively to further its goals, whether it wants to prioritize innovation over handouts to traditional industries and whether it’s prepared to wield its financial muscle to force member states like Hungary and Poland to respect the rule of law.
Britain’s departure from the EU leaves a hole of at least 60 billion euros ($65 billion) in the budget that needs to be plugged by either cutting spending or making others pay more.
But the EU’s shifting priorities also require more money for issues like climate change and migration and those who gain from the traditional focus on agriculture and regional development are fighting to keep their benefits.
Essentially though, the EU is split into two basic camps: those who want to spend more, and those who can see they’ll get stuck with the bill.
The Netherlands, Austria, Denmark and Sweden have argued for keeping the spending ceiling at 1% of the EU’s gross national income and for a permanent system of rebates to limit their contributions. They want to focus on new priorities and to curb the outlay in traditional areas and have called for tougher conditions on adhering to the rule of law.
“Our countries are firm in our priorities. We cannot accept a drastic increase in our fees. We are willing to continue to pay significantly, but there are limits,” Swedish Prime Minister Stefan Lofventweeted after a meeting with the other three so-called frugal leaders. “It will be a tough negotiation.”
(Bloomberg) —Yield hunters are excited about Greek bonds these days, but the rally in the debt by no means suggests higher probability of a sovereign upgrade to investment grade.While the nation’s economic growth may stay aboveeuro-area average, according to the European Commission, many hurdles still remain to a rating improvement. The debt-to-GDP ratio is the region’s highest, even if it is expected to decline, and the banking sector is still burdened by bad loans, which are to be reduced under the Hercules program.
Moreover, any results of progress made in economic and fiscal policy will only become visible in the longer run. Before any positive change in ratings, credit watchdogs will want to be sure that Greece continues on the reform path and achieves its goals.
After Fitch Ratings raised its credit rating for Greece last month to BB with a positive outlook, the country is still two steps short of investment grade. At other three rating companies, the country is still three notches into junk territory. Even if they were to upgrade the nation by one notch on each review date in the current year, it would still stay sub-investment. In any case, a six-month interval between the reviews is a very short period of time to be able to identify additional structural improvements.
Even if Greece is raised to just one step short of investment grade, it wouldn’t mean that its exit from junk is near. Portugal, which has always had an investment grade at DBRS, had to wait at least two years to win such a rating at S&P Global and as much as six years at Fitch.
(Bloomberg) — The novel coronavirus spread further as China reported an increase in fatalities and infections, and the country extended the Lunar New Year holiday for an unspecified period of time.
Canada confirmed its first case while the U.S. announced a fifth. President Xi Jinping on Saturday ordered a faster response, sending teams into hard-hit areas to push local officials to strengthen prevention and containment.
More than 2,000 cases have been reported in 15 countries and territories.
About 2,051 cases in China, at least 56 deaths: Tracking the outbreak
Track business and travel disruptions
QuickTake: Learn more about the virus
Here are the latest developments:
China reports rise in Hubei deaths (9:19 a.m. HKT)
Another 24 people have died in Hubei province, according to China’s CCTV. The latest information brings the total death toll in mainland China to 80, based on latest information.
The report said 371 new cases have been confirmed in the province as of Jan. 26. Wuhan, which is at the center of the virus outbreak, is located in Hubei.
China CDC advises extending holiday (5:01 p.m. HKT)
Gao Fu, head of the Chinese Center for Disease Control and Prevention, told reporters that the agency is advising that the Lunar New Year holiday ending Jan. 30 be extended due to the virus. The decision will depend on how the situation develops, he said.
Beijing will lengthen the winter break for schools from kindergarten to college, People’s Daily reported, citing the city’s education bureau.
Hong Kong confirms sixth virus patient (4:50 p.m. HKT)
A Hong Kong health official confirmed the sixth case of the coronavirus in the city.
The South China Morning Post earlier reported that the man had been to Wuhan and arrived in Hong Kong by high-speed rail. He will undergo more tests. It was not known when he returned from China, the newspaper said.
Protest over proposed quarantine center (4:15 p.m. HKT)
Government plans to use a newly built, unoccupied public estate in the New Territories district of Fanling for possible patients under quarantine and medical staff drew an angry response from residents and district councillors.
A couple dozen masked people barricaded a road in Fanling in protest at the government proposal to use Fai Ming Estate as an emergency medical facility. Some of the protesters said the building is too close to their homes, while others complained that approved applicants would lose their flats in the estate.
China says pathogen’s transmission is increasing (4:25 p.m. HKT)
Chinese authorities on Sunday told reporters the virus isn’t yet under control despite aggressive steps by authorities to limit movement for millions of people who live in cities near the center of the outbreak. Officials said information on the new virus is limited even though the pathogen was identified relatively quickly, and its transmission is increasing.
The government said it will hold daily press briefings on the situation.
China bans wildlife trade (2:36 p.m. HKT)
China banned the shipping and sale of wild animals starting Sunday and said it will quarantine breeding sites. Trade will be forbidden in markets, supermarkets, restaurants and online, the market supervision administration, agricultural ministry and forestry bureau said in a statement.
It also warned people against consuming wild animals. The new coronavirus was first found in people who shopped or worked at a so-called wet market in the central city of Wuhan, where live animals were sold.
China has tightened controls on the sale of exotic animals, considered nourishing in some parts of the country, though some are still sold surreptitiously.
Athens opposes Libya’s maritime accord with arch-rival Turkey
Greek premier, Germany’s Merkel discussed Libya on FridayBy Eleni Chrepa and Paul Tugwell
(Bloomberg) — Greece warned it may try to block any Libyan peace deal that doesn’t resolve a dispute over regional maritime borders, as Prime Minister Kyriakos Mitsotakis met with military commander Khalifa Haftar ahead of a Berlin conference on the country’s future.
The Greek government, which won’t take part in the Berlin summit, will not accept any political deal for Libya that doesn’t annul an agreement the country struck with Greece’s rival Turkey on maritime borders, Prime Minister Kyriakos Mitsotakis said in an interview on Thursday.
“Greece will veto, even at foreign-minister level before it makes it to head-of-state level,” any Libya agreement that doesn’t annul the pact with Turkey, Mitsotakis said.
Greece may not get that chance.
Mitsotakis was left off the invitation list for the peace talks in Berlin this weekend, where German Chancellor Angela Merkel, Italian Prime Minister Giuseppe Conte and U.S. Secretary of State Michael Pompeo will join Russia’s Vladimir Putin and Turkey’s Recep Tayyip Erdogan, the two leaders who’ve been calling the shots on Libya.
The politicians in Berlin are seeking a deal on foreign intervention after Russia and Turkey failed to persuade Haftar on a visit to Moscow to agree to a ceasefire.
The battle to secure control over the government has reduced oil-producing Libya to near-failed state status, with the country becoming a center for migrant trafficking across the Mediterranean.
President Recep Tayyip Erdogan said Thursday that Turkey plans to issue new exploration licenses in the eastern Mediterranean following the maritime deal with Libya, a step likely to add to tensions with Greece and the European Union. Erdogan, who backs Fayez al-Serraj’s government in Libya, said Friday that Haftar is not reliable.
“We encouraged Commander Haftar to participate in the Berlin process with a positive spirit,” Greek Foreign Minister Nikos Dendias told reporters after a meeting in Athens. “We expect Germany to safeguard the European position for Libya matters.”
Greece “will do whatever it takes” to protect its sovereignty if Turkey begins hydrocarbon drilling in waters Greece claims as its own, Mitsotakis said, adding that he doesn’t believe the situation in the Aegean will escalate.
Mitsotakis also held a call with German Chancellor Angela Merkel on Friday to discuss the issue.
Greece should have been invited to the Berlin summit, Mitsotakis said. “We should be in Berlin to discuss the future of a country whose stability is of interest to Europe, and of particular interest to Greece,” the premier said.
Greece’s participation in the conference had never been considered, German Government Spokesman Steffen Seibert said at a news conference in Berlin on Friday.
Berlin shared Greece’s concerns about the maritime dispute, which was already being dealt with in separate European forums, he added.“This conference doesn’t deal with that issue.”(Updates with foreign minister comment in 10th paragraph, Merkel call in 12th)–With assistance from Sotiris Nikas and Raymond Colitt.
Erdogan Says Turkish Energy Exploration to Follow Libya Deal
Thursday, January 16, 2020 02:09 PM
By Selcan Hacaoglu and Firat Kozok
Turkey will issue new exploration licenses in the eastern Mediterranean now that it’s set a maritime border with Libya, President Recep Tayyip Erdogan said Thursday, a step liable to exacerbate strains with Greece and the European Union.
Erdogan’s remarks underlined Turkey’s determination to press its claims in contested waters of the energy-rich eastern Mediterranean, where European nations, Egypt and Israel have built a forum to promote their interests. Turkey insists it has rights to energy finds there due to its claims to Cyprus’s north, which it seized in 1974. Greece, Cyprus and the EU oppose Ankara’s drilling operations within the island’s exclusive economic zone.
Tensions over the conflicting claims have escalated since Turkey and Libya signed a contentious agreement in November that delineates maritime borders and affirms claims of sovereignty over areas of the Mediterranean. Turkey’s demands could make it more difficult and costly to build a planned natural-gas pipeline that could link the eastern Mediterranean basin with European markets through Cyprus, Greece and Italy.
“From now on, it is not legally possible to carry out any exploration activity or construction of a pipeline in areas between Turkey and Libya without the permission of both countries,” Erdogan told a televised conference in Ankara. “We will issue licenses for these areas and start exploration work in 2020.”
Greece, Cyprus and Egypt see the deal with Libya as a brazen Turkish bid for dominance in the contested waters. Libya is also in conflict with Greece over off-shore exploration licenses Athens issued for waters south of Crete, which is located between Turkey and Libya.
Turkey extracted the maritime agreement from Libya’s internationally recognized government in exchange for military assistance in the North African nation’s civil war. Ankara and Moscow are now trying to bring the warring sides to a truce, which would also protect the accord.
The eastern Mediterranean has been one of the world’s most prolific spots for major gas discoveries during the past decade. Noble Energy Inc. found the Leviathan gas field in Israeli waters in 2010 and Italy’s Eni SpA discovered the giant Zohr deposit off the Egyptian coast in 2015. Exxon made a discovery off the southwest coast of Cyprus last year.
Turkish drilling ships are currently operating off Cyprus in waters declared by Turkey as its own economic exclusive zone, under agreements with the northern Turkish Cypriot state, which is recognized only by Turkey. The EU is weighing sanctions against Turkey over its oil and natural-gas exploration off Cyprus, and Cyprus wants the International Court of Justice to resolve its dispute with Turkey.
The announced closure of the International Monetary Fund’s office in Athens feels like a landmark, even though Greece, unlike many other crisis-hit nations in recent decades, was emphatically not bailed out by the IMF. It’s a moment to reflect on whether Greece really has been bailed out by anyone.
Technically, Greece is no longer a country in crisis. It’s more indebted relative to its economic output than any other European Union member state: Its debt-to-GDP ratio stood at 180.2% at the end of the second quarter last year, compared with an EU total of 80.5%, and there is no significant downward trend. But the European Commission sees the debt burden as sustainable and projects that it will drop to 100% of GDP by 2041. A 2018 deal, which smoothed out Greece’s repayments, helped greatly with that.
Other indicators look bad but not catastrophic. Unemployment is down to 16.4% from a 2014 peak of 27.8%. The economic growth rate is finally in positive territory, projected by economists tracked by Bloomberg to reach 1.7% for 2019 and 2% this year.
From the IMF’s point of view especially, there’s little left to do in Greece. Last year, the country made an early repayment of 2.7 billion euros ($3 billion) on its relatively expensive debt to the IMF. Now, it only owes the fund, which made its last disbursement to Greece as long ago as 2014, a mere $6.3 billion out of a total of $340 billion in external debt.
But in effect, the crisis and the rescue efforts have cast Greece, an EU member since 1981, down to the economic level of some of the newest member states. Its per-capita GDP, adjusted for purchasing power parity, has stabilized at a little more than two-thirds of the average EU level, about the same as in Latvia or Romania. The high taxes forced on Greece by creditors have created an informal economy about as big, relative to GDP, as in these and other Eastern European countries.
According to Elstat, Greece’s national statistical agency, net migration has been positive in the last few years, but that’s more of a problem than a happy development. Greeks have been leaving the country of about 11 million at a rate of more than 100,000 a year since the crisis started. The outflow only has been offset by the arrival of migrants from the Middle East and Africa during the recent refugee wave — a burden Greece struggles to process.
Unlike Eastern European countries, however, Greece has never received much of a remittance inflow from its emigres. In fact, such transfers of funds have even dropped since the crisis-driven mass emigration started.
Greece also has less flexibility to foster economic expansion than the Eastern European nations: Agreements with creditors forced it to run primary budget surpluses, and even despite low interest rates, its financing needs are much higher than the Eastern Europeans’ because of the sheer size of its debt pile. Romania, for example, has a government debt-to-GDP ratio of just 34%.
What’s more, unlike their Eastern European counterparts, Greek banks are saddled with enormous amounts of non-performing loans, which aren’t declining fast enough to allow banks to expand credit. The Greek banking system’s bad-loan ratio stood at 42.1% in September, the latest month for which data are available. In Romania, that ratio is below 5%.
Greece, in other words, isn’t just starting from a low base like the Eastern Europeans — it’s doing so while dragging around a ball and chain. The center-right government of Kyriakos Mitsotakis is trying to offload the bad debt from banks’ books and lower taxes, but Greek governments’ flexibility in fixing the economy will be limited long beyond Mitsotakis’s tenure.
In a way, the restrictions are fitting payback for what went wrong in Greece. In a September 2019 speech, Poul Thomsen, director of the IMF’s European Department, said Greece’s crisis was different from the contemporaneous ones in Spain, Ireland and Portugal. In those countries, adoption of the euro drove a private credit expansion that led to an “unsustainable demand boom.” In Greece, by contrast, it was the government that feasted, raising pensions and social transfers by 7% of GDP between the single currency’s adoption and the onset of the crisis. That, in Thomsen’s view, explains Greece’s bad fortune in facing a greater fiscal tightening than Europe’s other crisis victims.
By extension, Greece’s political elite must learn to live with the long-term restrictions. An obsessive spender needs to be separated from his credit cards. Contrary to what’s often assumed, Greece’s private creditors were punished, too, for supporting the government’s appetites — they took a major haircut in 2012.
In other words, a lot has been done to minimize moral hazard on the part of Greek politicians and private investors. But it still exists for the IMF and the EU, which have collectively worked out the punishment that came as part of Greece’s financial rescue. They won’t be responsible for any of the mistakes they made during the bailouts — underestimating the depth of the crisis, demanding the draconian tax increases, insisting on budgetary tightness even as it translated into continuing economic decline.
The IMF is getting paid back ahead of time. Yields on the bonds issued by the European Stability Mechanism to support Greece, are negative, so Europe can well afford to be lenient on Greece’s repayment terms. The Greek crisis has delivered tough lessons to Greece’s elite and to bankers. But the IMF and the European Union are free to handle the next crisis in the same bungling ways, battering the victim but taking on little of the cost.
Of course, the world doesn’t have to be fair, but Greece’s institutional creditors should consider shouldering more of Greece’s burden. If the Mitsotakis government, and perhaps its successor, make substantial progress in getting Greece’s economy to grow again and Greek emigres to come home, nominal debt cuts shouldn’t be ruled out. It’s not wrong to make Greece wear its ball and chain, but making it do so indefinitely is excessive.
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