Europe's debt crisis
World's worst menu
Greece has no good options left
May 26th 2011 | Berlin | from the print edition
VIENNA’S glories are largely faded but its name is being mentioned with increasing frequency by the euro area’s policymakers. The “Vienna initiative” was a plan, drawn up in 2009, that halted the rot of financial contagion spreading through central and eastern Europe. Foreign banks pledged not to cut their exposures to the region and run. It is now being discussed as a possible model for resolving Greece’s sovereign-debt crisis.
The need to come up with a new plan for Greece is mounting. On May 20th Fitch, a ratings agency, cut the country’s debt rating by another three notches. Yields on Greek ten-year bonds this week reached 16.8%, more than twice what they were a year ago. With the markets shying away, the country will not be able to borrow afresh next year, as had originally been hoped when the country was first bailed out in May 2010. The IMF’s latest review is due out in June; it is likely to praise Greece for its progress so far but also to fret about how next year’s numbers add up.
The Greek government is playing what few cards it still has. On May 23rd it announced plans to speed up the sale of state-owned assets, including its telephone company, post office and ports. Under pressure from its neighbours and the fund it hopes to raise ?50 billion ($70.8 billion) from privatisations. Asset sales are an attractive way of cleaning up the public balance-sheet without doing anything that further chokes demand. There are, however, doubts that Greece can realise its ambitions, partly because the absence of a land registry means that the government may not have clear legal title to all of the things it wants to sell, partly because it is not clear what price they could fetch, and partly because privatisation arouses political opposition at home.
In any case, sell-offs will not happen quickly enough to bridge the financing gap in 2012. That leaves Europe facing a range of unpalatable options (see table). No European policymaker seems willing to countenance a serious haircut on Greek debt yet, for fear that it undermines confidence elsewhere. And no European politician wants to be seen giving more taxpayers’ money to the Greeks without getting something back.
Another option is a “reprofiling”, whereby creditors agree to a voluntary extension of the maturity of their bonds. That would not sort out Greece’s finances—it might reduce the net present value of Greek debt by up to 20-25%—but it would keep the country away from the markets for a while. But the ratings agencies have said that such a “soft restructuring”, or even the buyback and cancellation of outstanding bonds (which Moody’s calls a “restructuring by stealth”), would count as a default and lead to further cuts in Greece’s rating. That makes it unacceptable to the European Central Bank (ECB), whose opposition to any form of debt restructuring borders on the pathological.
Hence the interest in a second Vienna initiative, whereby Greece’s existing creditors would band together and agree to roll over their exposures to Greek debt when they fall due. That would give Greece more time to fix its finances, might keep the ratings agencies at bay, and perhaps even satisfy the ECB. But it would do nothing to reduce Greece’s debt burden and would be hugely difficult to co-ordinate. Bondholders are harder to marshal than bank lenders. And Europe seems unable to get any message straight. “At every meeting we say that we have to get communication right,” says a euro-area minister. “And then someone talks after the meeting.”