The biggest public debt restructuring in history is not a world first that makes us proud, despite the enormity of the achievement on a technical and negotiatory level, the massive complexity and difficulty of the task. It represents, as Prime Minister Lucas Papademos said in his statement, a moment of relief, but also a moment to ponder on those who trusted the Greek state and who incurred financial losses. It is also the end product of Greece’s historic failure: the irresponsibility of the past rendered the debt unsustainable, leading to the restructuring. But, the loan agreement and the PSI are the best possible arrangements for the public debt that we could have achieved in the real world, given the current circumstances and dynamics.
Some argue that the restructuring should have taken place earlier, in May 2010. Who would not have preferred a larger writedown without consequences? What they tend to overlook is that the difference between a moderate, “velvet” restructuring (March 2012) and a destructive default is made by the support of our partners and cooperation of our creditors. It is assurances for the banking system and the continued financing of Greece, it is the preconditions for remaining in the euro. Such terms did not exist in 2010, nor did the will of our partners. The conditions were not ripe. How could they have been, after all, as long as the country still had a massive primary budget deficit, was lagging in reforms and had made no fiscal adjustments to speak of? A haircut in 2010 would have amounted to a unilateral default, and any attempt to impose it would have resembled a kamikaze mission.
The PSI deal has not only cut 107 billion euros from the public debt. It has achieved a major lengthening of the average debt repayment period with new bonds of up to 30 years’ maturity, with a very significant reduction in the interest rate and annual servicing cost, and with a 10-year grace period. It ensures continued funding from our partners and the International Monetary Fund until the end of the program and for as long as necessary.
The PSI deal and the loan memorandum create a very powerful and mutual incentive for Greece to remain in the euro. A return to the drachma would make the debt totally unserviceable, harming both Greece and its creditors. By passing the debt from the markets onto the “official” sector, we have tied our place in Europe, and our partners and creditors have acquired an incentive for the program to work, for growth to return, because otherwise they would risk losing their money. Therefore, the European Union and the IMF have a powerful interest in making every effort in the future to render our stay in the euro viable.
The agreement that was reached keeps Greece at the European negotiating table. We remain participants in the common course of the eurozone, where the dynamics favoring growth are expected to improve. This means increased potential not just in future, but imminently too. Greece is in a favoured position as regards technical support from the European Commission (which is providing technical assistance through the Task Force) and support for the absorption of EU structural funds. Because the biggest factor that continues to paralyze the Greek economy is lack of confidence in its prospects, and lack of liquidity for the banking system and firms. Only a credible, comprehensive deal with our creditors can turn the quicksand under the Greek economy into solid ground. And this is the deal achieved by the government of Lucas Papademos.
The economic program is harsh and painful. It is a program of last resort, which we would not have adopted under normal circumstances. But, it contains changes that we should have implemented by ourselves over the course of time. It also contains important growth factors: From measures to rein in public sector waste, to reforms in the civil service, tax administration and health system, to recapitalizing the banks, liberalizing professions, improving the business environment, absorbing EU funds and speeding up the dispensation of justice.
No loan agreement can solve the problem on its own or eliminate all the risks. No loan deal can substitute the will of a people to persevere, to grit their teeth and face the crisis, with hard work, patience and solidarity, to stay on our feet, defending Greece’s place in Europe and the euro. No PSI or memorandum can deliver this on their own. Only we can.
* George Pagoulatos is a professor at the Athens University of Economics & Business and senior adviser to Prime Minister Lucas Papademos.