Wednesday, November 14, 2012 11:13 am
Bank lobby chief: Greece needs help, not writedown
By DEREK GATOPOULOSAssociated Press
Charles Dallara, managing director of the Institute of International Finance, said the 17 eurozone countries should find a better balance between policies that favor debt reduction - their focus so far in the crisis - and those that help growth.
An over-emphasis on budget cuts will increase the risk of a "protracted era" of recession or low economic growth in Greece, he warned at a banking event in Athens.
"I do argue for a course adjustment to moderate the path of fiscal adjustment to allow some breathing room for this economy ... so that we don't find the debt-to GDP ratios running away from us, making us feel like we're chasing rabbits down holes," Dallara said.
Greece's economy has shrunk by 20 percent since its crisis began in 2009 and unemployment has risen to a record 25 percent. The country is expected to enter a sixth year of recession as investors pull money out of the country and the government keeps cutting spending and raising taxes to comply with the demands of its international bailout.
"It's my view that everything must be done to avoid this reality," Dallara said of the deepening recession. "What is needed instead in my view is to ease the case of fiscal adjustment."
Dallara led negotiations with Greece earlier this year to restructure the country's debt held by the private sector, wiping some (EURO)100 billion off the national debt.
Despite that writedown, Greece's debt load is currently still growing.
It is not expected to be able to reduce its debt to 120 percent of GDP by 2020, as stipulated in its bailout deal with rescue creditors, the other eurozone states and the International Monetary Fund.
The eurozone states are in favor of giving Greece an extra two years to reach that level, but the IMF disagrees. If Greece does not get more time, it would have to receive more rescue loans, something eurozone states are loathe to do.
To help Greece meet the target, Dallara argued that the IMF could increase its contribution in the bailout program and provide concessional rates that are usually reserved for poorer countries.
But it was unrealistic to expect Greece's public sector creditors - which include the European Central Bank and fellow eurozone states - to take losses on their Greek bonds because there is political resistance, he said.
The ECB has said that by law it cannot directly take such losses, also called a `haircut'. Eurozone states, who are owed money from the bailout loans they have been granting Athens since May 2010, would likewise resist such a move. Some eurozone leaders have argued that they could not justify giving more rescue loans to a country that has just defaulted on a part of its obligations.
"I don't think, to be quite honest, the politics work," Dallara said.
Instead, he argued in favor of easing the deficit reduction targets for Greece. He said it was best to reduce the deficit, which is forecast at 6.6 percent of GDP this year, by only 1.5 or 2 percentage points a year. Athens is now tasked to cut it by 4 to 5 percentage points annually.