For six years the Greek crisis has unfolded in a predictable pattern: Greece needs money. Euro area leaders don't want to give it to them without imposing tough conditions. Brinkmanship ensues, followed by some sort of ineffectual compromise.
According to Willem Buiter, Citigroup's chief global economist, it's time to break that cycle.
This is how he and his team of economists say they would do it, as spelled out in Citi's research note "It's Time to Break the Never-ending Cycle of Crises in Greece," which was sent out this week.
Since drastic structural reform seems unpalatable to Greeksand without it, extra support from Europe is unlikely to arriveBuiter and his team have posited an alternative scenario.
... For the next agreement between Greece and its creditors to break the cycle of never-ending and mutually damaging brinkmanship, it needs to satisfy two essential conditions: first, to grant the Greeks their wish to be (or appear to be) masters of their own destiny; and second, to limit the exposure of the country's creditors. This could be achieved in five steps:
The first step on the path to a solid Greek agreement is, Buiter said, allowing the Greek government to do as it pleases, though fiscal deficits would "have to be funded in the markets." This means that policies taken up would be owned by Athens, rather than simply imposed on it by the troika and the European Stability Mechanism (ESM). "The awkward and humiliating ritual of intrusive oversight by international institutions should end," Buiter added.
Second, Greek debts that are owed by the state and payable to the ECB and IMFroughly 48 billion ($52.5) in totalshould be bought back by the ESM. This is key, said Buiter, because the Greek government could then "declare a moratorium on its publicly owned liabilities, its privately owned liabilities, both or neither. It could turn some or all of its liabilities into real [gross domestic product] growth warrants or suspend debt service until real GDP reaches, say, a level 10 percent above its previous peak level (2007). That choice would be driven by the relative importance of future market access versus current debt service and austerity." In effect, it would allow Greece to expand its way out of recession.
Third, Buiter said, international institutions should stop lending Greece money "in return for continued funding and some debt relief by Greece's 'official creditors.'" Essentially, the Greek government needs to be on its own financially, he said. This is risky because it's unclear whether the markets would support Greece at this point. As Buiter noted: "If the markets were to be willing to lend to the Greek sovereign, good luck to them."
Next, in order to fend off money from international institutions going through back doors and straight back into the Greek government's coffers, the ECB would no longer accept government debt or financial instruments that are guaranteed by the Greek sovereign as collateral for routine or even emergency funding operations. Greek government bonds could again become eligible once the country has won back its investment-grade credit rating, or something similar.
The fifth and final piece of Citi's plan involves the Emergency Liquidity Assistance (ELA), which is provided by Greece's central bank as long as the ECB's governing council gives its approval. This has been the key funding source for the Greek banks for the many months, so it's a rather important cog in Citi's plan. Citi said there needs to be "recapitalizing and restructuring" at these banks in order to give them the ability to function without Greek government-related collateral to secure loans. European authorities should carry out this restructuring, probably through the ESM, which would leave the mechanism as the mainperhaps the onlyshareholder of Greek banks. Following this, Greek banks would still have access to funding from the ECB and ELA, assuming that they are deemed fit to offer adequate collateral that is not related to the Greek government. Wrapping up this point, Buiter said the ECB would probably bar Greek banks from creating new loans or other forms of funding to the state. Even with these steps, Greek banks could need as much as 45 billion of additional collateral, which could still mean potential depositor bail-ins. Recapitalizing the banking system is not going to be inexpensive.
Still, the plan in its entirety, Buiter said, achieves a number of things.
Principally, it would allow Greeks to "take ownership" of Greek policies and sets up a way to rescue Greek banks without simultaneously rescuing the Greek government, Buiter said. It would also propel the ESM to a place of massive importance, effectively overtaking Greece's central bank. The ESM, combined with a sovereign debt restructuring mechanism (SDRM) that would monitor the fiscal health of euro zone economies, "together would constitute the European Monetary Fund, or EMF.
As Buiter put it: "It would be an IMF with teeth."
Our proposal ends the soft bailouts of the Greek banks and government that have been conducted under the guise of liquidity assistance by the ECB and the Bank of Greece, thereby capping the damage done to the ECB's credibility and also limiting the incessant rise of bailout fatigue and Euro-skepticism in the creditor countries. It also spares the IMF from throwing its principles overboard by again going along with lending to a patently insolvent sovereign. The distasteful situation where countries that are much poorer than any Eurozone state are put at financial risk to bail out Greece would be brought to an end.
One wonders what euro zone leaders meeting in Brussels on Tuesday might make of it. And what the Greek peopleand politicianswould think.