Greek default: A Lehman Brothers Moment for Eurozone?

Prabir Purkayastha (PP): Hello and welcome to Newsclick. Today we have with us Prof. Jayati Ghosh to discuss the Greek crisis. Jayati you have discussed the Greece crisis a number of times. Now it does look there is going to be impending default which is almost at offing. There is a possibility of a financial crisis of much bigger scale like happened after Lehman brothers. Do you think there is immediate possibility?

Jayati Ghosh (JG): I think it's an inevitability. I don't think it is a possibility anymore. Let me just step back a bit and say it is no longer just Greece. What happened now is sort of enlargement of horizon shall we say of this crisis. It's now about Europe. But it's not just about Europe, it's about the financial system. I think one thing that is not coming up clearly in lot of media reports about this, this is not a lot about public debt, about fiscal overspending, problem of sovereign debt. It's really a problem of finance and it is a financial crisis exactly the previous crisis was a financial crisis.

 

 

PP: If look at that. In fact it is a very important point to make is essentially, the bank has lent a lot of money. Of course you have private debt of Ireland being taken over by the government, guaranteed by the government. Similarly, some of the debts of these countries are being guaranteed with the government. So it is the crisis also of the banking system. Also French and German banks who have also have also extended all these loans. So essentially the crisis would be the Greek defaults then this banks could be in trouble and therefore, then the entire financial system would be in trouble. Is that what you really say.

JG: Well, two things I am saying. One the crisis occurred because of finance. It didn't occurred because of government misbehaving being very bad.

 

 

PP: In fact Italy and Spanish cases has been clearer. They were not over spending.

JG: Well the Italians were, but the Spanish certainly weren't

 

 

PP: If it is Greece, Ireland, Spain and Italy which is what now the countries which is involved and out of these overspending is not the issue.

JG: That's the first part. The second part is actually Greece accounting is really not a big deal markets have also accounted for that. The markets have assumed that the Greek debt will not be paid in full a very little of which is now which is held by private banks. Most of which is held by the ECB, European Commercial Bank. So they have taken over most of the debts. A little bit is left and the banks have more or less accounted for that. The secondary market has discounted for the possibility of Greek default. The real problem is that now people realize that Greece is the first domino and once the bond market behaves aggressively behaving which they already have, Spain which is on the verge of doing, they have certainly started doing it with Portugal, then it can go anywhere. ECB simply doesn't have enough reserves to actually deal with all of that.

 

 

PP: Your are talking of something like two trillion dollars which is required to stave of the prices and that would mean financial commitment of that order. The European governments primarily Germany and France.

JG: You know that's one way of looking at it. If you are looking at current valuation of debts. Many people will argue that the current valuation is wrong. In fact the major and extra ordinary thing about the last three years is in fact all the people who have paid, all the agents that have had to suffer, none of them has been a bank. In fact all the banks that have lend to Spain, Portugal etc., the debts are intact, none of that has been actually none of them has been forced to take a haircut in a significant sense. There has been a little bit of haircut. Some of the Greek creditors have been offered a very very small. So they had to pay nothing for their irresponsible lending. Now if we say, if you have lend responsibly then just like a debtor has has borrowed responsibly you have to take some of that pain. Then there is no reason to say that entire amount has to be paid. I would argue that let's say half have to be discounted.

 

 

PP: Fifty percent haircut

JG: They have presented as fifty percent haircut but what they have been doing. They are adding all that unpaid part on to that principle and then compounding that. So basically bailing out means protecting irresponsible financial system which is behaving in this fashion. On the other side of that, if the banks are not paying the cost of what they have done, so the people are. 

 

 

PP:So there is huge austerity measure, there is asset stripping. In fact one of the proposals that French are making is that take away all Greek public assets and put away in holding company which is there for becomes effectively privatized. These are huge.

JG: These is huge. There is even a worst proposal from Finland which is saying that they want natural resources in return to the credit that they are willing to offer. So this is really major way talking about massive corporate take over of everything.

 

 

PP: Now, it is an interesting issue. Here it is a private bank lending irresponsibly. You have a crisis. The net result is people of austerity have no jobs, deflation of the economy, huge recession that is going to continue and loss of all future possibilities of coming out of it by the loot of the public resources.

JG: Amazing thing about these measure in Greece and everywhere else is that they are not giving you any signs of hope. What happens in a normal developing country crisis. You go through absolute turmoil, pain and disaster. You suffer and the people suffer and there is hope at the end of it because the currency devalues. Here there is no such hope. You have been told that you have lost generation, not just a lost decade. You have to keep suffering, suffering and suffering. It's extraordinary because every one of these austerity measures is completely counter productive. It all makes your debt ratio, your fiscal deficit GDP ratios worse. So what's the point?

 

 

PP: In fact, there is interesting headline somebody has given. Germany and France riding on the chariot pulled by the pigs.

JG: Yes, absolutely. It is. You know when you are looking at resolution of this crisis, there are two aspects to it. The stock aspect and the flow aspect. The stock aspect what you said, the size of the debt and as long as the huge debt hangs nothing will happen. So that has to be restructured, that has to be reduced. Then there are going to be big problems. Then that has to be reduced. Then there is that flow problem which is that these are the countries in deficit why because there are other countries which are surplus. Obviously, if they have to rectify the deficit reduce it or turn it into surplus, the surplus countries have to be willing to reduce their surpluses and convert to deficits. Germany, the biggest surpluses, is the Germany willing? No, again it is a problem that can't be resolved. You have a Germany you increase your deficit, you reduce your deficit, you increase your deficit but I will not reduce my surpluses. How all that work, that doesn't add up.

 

 

PP: This is in fact the problem of the Euro Zone which we have discussed earlier effectively Euro Zone can survive if there is political will to do these things. In this case, there isn't and neither Greeks political will can continue definitely to go into recession. People continue like this, nor German people allowing for their surplus to be reduced. So really in that sense, solution is a dissolution of Euro Zone.

JG: Yes, even that is not a full solution. I am really beginning to see within the current architecture of the international economy. There are no solutions. Things are going to keep breaking. The Euro Zone will break, other things are going to break. We are seeing a major implosion.

 

 

PP: So we are really going to talk about this brings out like the crisis of 2008 the larger political crisis of the financial crisis itself and what we are really talking about the housing of the mortgage crisis or debt crisis but the much larger crisis the financial system which is not going to resolve any of this.

JG: Absolutely, these are not two separate crisis. This is the continuation of that crisis. What started in 2008 is not over. We haven't had at one, we had a little bit of intermission, this is at two, it's going to be three or four acts. It's a tragedy.

 

 

PP: It is an interesting issue, the Ireland crisis is inf act the private banks in Ireland had taken bad or had been involved in the housing crisis earlier and that's what Ireland government would up and now again going back into the US market.

JG: Exactly, these are all very very closely interlinked and for United States to sit back and say you know it's your problem you better sort it out. It's ridiculous. They were instrumental in creating the European crisis.

 

 

PP: Thank you Jayati. I think this has been a very interesting discussion as it unfolds. Thank you very much.