‘…the comments by Mrs. Merkel and Mr. Sarkozy were seen as a signal to banks and bondholders that they will not be made to incur losses on Greek debt.’ Again, wrong comment, wrong conclusion. They will. There is no way through policy maneuvering, made in France and in Germany (you bet; these two countries are holding almost 60 percent of Greece’s outstanding debt), that the private sector won’t be forced to accept the truth. And the truth is that in the medium term it must lose certain money due to earlier reckless borrowing.
Hence, chancellor Merkel and president Sarkozy are wrong when saying that ‘any private sector involvement should be “voluntary” not compulsory.’ Well, by the nature of the case at the end of the day it must be negotiated and agreed. You can call it ‘voluntary’, not ‘compulsory’. I call it indispensable. Instead of wasting more time with unrealistic scenarios, better to start restructuring the Greek debt right away. It must imply writing a slice of it, and how big a slice? That’s a good question.
While I was Poland’s finance minister I had signed in 1994 an accord with the London Club of private creditors. Until the agreement, as much as half of nonperforming debt had been reduced. However, it was done under very demanding conditionality, calling for far going structural reforms and progress in liberal institutional building. After hard work, we succeeded. And what about the foreign creditors? Have they lost a lot of money? I don’t think so. They were the winners too, since it happened to be sound long-term investment. Such agreement pays until today for both sides of the transaction.
So it can be in the case of Greece and its creditors. Yes, it is already a ‘credit event’. The alternative is not ‘voluntary’ or ‘compulsory’. The choice is between restructuring ‘by design’ or ‘by chaos’. It goes without saying that the latter will be much dearer.