Adrian Hamilton: Save Greece and we save ourselves

International Studies
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The Independent Online

While politicians here are resolutely refusing to discuss the detail of cuts for fear of putting off the voters, the commentators, along with the financial experts, are all busily urging ever more draconian action by Greece and blaming its workers for rising up in protest.

Greece's financial problems face the EU with its greatest crisis since its founding. Unresolved, they could force the break-up of the euro and the fracturing of the Union itself. And yet the whole discussion is taking place in an atmosphere of dilatoriness and censoriousness, as if the markets alone were in charge of events and that they were the final judge of what would happen.

They aren't, and they shouldn't be. For this is a political challenge as much, if not more, than a financial one. It is the failure of the European leaders, and particularly Angela Merkel of Germany, to act with resolution that has spooked the markets and made them lose faith with Greece's ability to get out of the hole it has dug itself. If they had acted together firmly at the beginning, the collapse of confidence by international investors on the sovereign debts market would not have occurred. Even now when they have the IMF involved and have produced a broad agreement of intent to give Athens new funds, they have acted with such obvious irresolution that the markets have taken to doubting them.

Leave aside the question of where Greece leads, we may follow. Britain has a different debt profile and credit record, although our deficit is reaching Greek levels. Leave aside, too, the question of how Athens got itself into this position. Members of the eurozone allowed it to borrow at will and spend like there was no tomorrow, all the time pushing the consequences under the carpet. But if that sounds familiar, it is because it is. Half the world, or at least the developed world, was up to the same thing during the decade of growth.

So what do you do when it all comes to a juddering halt? The answer is the same for countries as it is for individuals and companies. You have to sit down with your lenders, go over the figures, look at the prospects and decide on a scheme that will enable them to get at least some of their money back and for you to avoid bankruptcy.

The difference with sovereign debt is partly the size of debt. We're talking tens of billions, not thousands. It is also context. At a time when the world is only just beginning to recover from a financial meltdown, markets matter and they tend to be extremely cautious about perceived risk.

In that sense the Greek crisis is a re-run of the banking crisis. There is a moment when markets take fright and their doubts feed on themselves. In the financial crisis, no bank could get funds because no one could be confident which one was next after Lehman Brothers fell. In the case of sovereign debt, the concern at Greece's predicament is already spreading to the markets for Portugal's debt, with Spain and Italy next in those brokers's lists of concern and Britain not far behind.

In the end it was governments stepping-in to support the banks and buy up bad debt that saved the financial system from meltdown. It is going to have to be the same with sovereign debt. Only governments have the resources and the means to outface a falling or freezing market, either by guaranteeing debt, or making substitute funds available or by buying up debt to change the rates. In the case of the financial meltdown they did all three. In the case of Greece they have done none.

One understands the reasons, particularly for the German hesitation. If you have behaved soberly through the years of plenty, and built up your savings and kept your borrowing restrained as the Germans have, the last thing you want is to throw them all away on a bunch of spendthrifts in southern Europe. Even aside from the constitutional question of the way the euro was set up to avoid such obligations, Mrs Merkel faces a democratic problem of popular opposition to such a bailout just before regional elections. You can also see why the British and other non-members of the eurozone are saying so little about this impending disaster for us as well as them. Nought to do with them.

And then there is the "moral hazard" argument – that if you save Greece then you simply promote bad behaviour all round. The libertine must be made to face the consequences of his loose life if others are not to follow.

It was the argument that Mervyn King employed in the crisis of Northern Rock and look where it got him – and us. A run on the bank. The trouble with doing nothing, or havering as the eurozone's leaders have, is that the crisis then feeds on itself. The markets get spooked, raise the cost of Greek debt (as they have), making it that much more difficult for the Athens government ever to restore their finances. And so it goes on.

You can argue that the Greeks have brought it on themselves. And so they have. But asking them to decimate their employment and castrate their economy in the interests of convincing markets that they mean business is self-defeating. People won't accept it all in one go like that, particularly when – as has been the case in the boom – the rewards of high spending were so unequally distributed between rich and poor.

There are better ways of managing retrenchment than risking revolution and there are other means of halting market slides. It's what British politicians are trying to do here, after all – to nurture growth whilst rectifying the finances. It's what even the Germans are attempting within their own borders. It's what we should be doing as a Union, when the leaders meet on 20 May.

It's not a question of bailing Greece out. It may not even be a matter of spending that much in practice. What it needs is the totally believable demonstration of intent. It was done with the banks. Now do it with sovereign debt.

For further reading:

IMF World Economic Outlook; David Stasavage: "Public Debt and the Birth of the Democratic State, France and Great Britain, 1688-1789"