With the commencement of a new administration, Greece, on behalf of its central bank, has recently set forth that further treasury bonds should not be emitted toward local Greek commercial banks anymore, but ought to be purchased by foreign investors. Obviously, the Greek government is determined to marry its extraordinary high level of outstanding public debt with foreign investors. This may represent a somewhat awkward strategy of hawking a grumpy bride, a rather deteriorated Greek economy. However, such strategy may also turn into a full-blown drama that could leave its mark on both Greece and other Euro area members.
At first glance, the Greek government's plans are very sophisticated: Given the relatively high inclination of the Greek society to object to radical policy solutions in terms of fiscal retrenchment and real wage cuts, the government's plan to draw on foreign investors is seemingly a tying hands strategy. The reason is that such an endeavour may possibly exert even more pressure to push ahead with fiscal retrenchment at the home front as foreign investors are likely to demand relatively high yields for refinancing Greece's mounting public debt. If such a tying hands strategy is successful, then this will help considerably to revamp the entire Greek economy.
The Greek economy has been suffering from real appreciation accompanied by increasing public debt levels particularly since the outset of the Euro area. This economic track has resulted in some very obvious inconveniences, notably low export and high unemployment levels. In addition to facing these fundamental hardships, policy makers have been struggling with the consequences of the current financial turmoil, which has put an enormous downward pressure on investment, employment and the real exchange rate. In the past, Greece would probably have surrendered and devalued its currency to stimulate its export industries, employment and thus economic growth. However, since Greece's admittance to the Euro area, the exchange rate is out of its political control. Hence, the new administration seeks other rather traditional means of cushioning against these adversities, by running for fiscal expansion and freezing the status quo, instead of engaging in a ‘short-run-pain-long-run-gain' fiscal retrenchment process. Opting for this strategy is fair enough given that everyone else is doing it more or less the same way in the course of the current global financial crisis. The only novelty here is the attempt to sell a grumpy merry bride solely to foreign investors. Against the background of global financial markets being cram-full of liquidity, this move is probably conducive to attracting several potential bridegroom candidates. At the same time, there is no doubt that this will considerably alter the bride's price, thereby helping the new Greek administration to push ahead with fiscal reforms in the domestic arena.
However, to put it bluntly: Is there anybody out there willing to buy a grumpy bride, whose parents just want her off the ‘pay roll'? If it turns out that foreign investors will not purchase further Greek public debt obligations, i.e. taking the risk of a further deteriorating Greek economy, then the entire Euro area will have to digest a full-blown drama. This would be a situation similar to Hungary's default last year, when foreign investors were not willing to further refinance an outstanding public debt level. Similarly, Greece will most likely verge on a rescue by its Euro area fellow members, as well as the International Monetary Fund. In sum, this is to say that other countries' taxpayers will have to take the burden of cleaning up a messy Greek economy and get into a politically arranged marriage with a grumpy bride.
What is really striking is the timing of such an awkward strategy of selling their tumbling economy by setting up a big fat Greek wedding with foreign investors: It is hard to conceive that the new European leadership duo - Van Rompuy and Ashton - will not provide a compensatory marriage portion. Unfortunately, such a rescue deal will not be a free lunch, neither for the Euro area, nor for the Greek society.
At the end of the day, when fundamental economic principles apply, it will all come down to cash. If the big fat Greek wedding plans really turn into a full-blown drama - having one Ouzo will not be enough. Yia mas!
Christian Fahrholz is a Senior Researcher at the Chair for Economic Policy at the Friedrich-Schiller-University Jena. He is also affiliated with the Graduate Programme "Global Financial Stability" at the Friedrich-Schiller-University and the Zukunftskolleg at the University of Konstanz. Andreas Kern is a Senior Research Assistant at the Jean Monnet Centre of Excellence for European Integration at the Free University Berlin.
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