Saturday, July 11, 2015

Is It Time for Greeks to Bail-in Greece?

Today’s lengthy and inconclusive Eurogroup could be summed up in one word: trust. After five years of broken promises, five months of non-negotiations, and five days of a vitriolic referendum campaign, most Europeans no longer trust Greece to fulfill its promises. And without trust, there can be no more money. Greece has no time to regain trust; instead, it needs to make a bold move. 

Now, before we blame the Germans or Finns for their stubbornness, let me ask my fellow Greeks this: Would you lend money to the government today? Would you trust Alexis Tsipras and his cohort with your savings? Do you believe that the government is willing and able to carry out the reforms that it is pledging? If yes, great; if not, how can you ask the German and Finnish taxpayers to trust a government that you do not? 

Here is my audacious proposal: structure the next bailout as a “matching funds” package whereby foreign money is disbursed in a fixed ratio to domestic purchases of Greek government bonds (maybe even bank equities). For every euro provided by a Greek citizen, European taxpayers and the IMF would offer three or four or five euros. This way, Greeks would invest alongside other taxpayers and would show, tangibly, that they trust their own government. 

This is my syllogism. Since 2010, household deposits in Greek banks have fallen by €85 billion. Part of this decline, of course, has been caused by people tapping into their savings to cope with a devastating crisis. But a huge part, including the €25-plus billion gone since November 2014, has been capital flight as Greeks have moved their money overseas or outside the banking system. And none of this includes Greek money that has always been overseas. 

In other words, if Greeks trusted their government with their money, they could easily finance the €80-odd billion that the Greek side is asking for in its third bailout package. Of course, there is still an issue of debt sustainability—why would a Greek lend to an over-indebted government? We will get to this below, but my point is this: Greece needs another bailout because no private investor, Greek or foreign, is willing to lend it money. If Greeks are not willing to lend money to their government, why should others? 

My sense is that a new package and even debt relief would be more palatable to taxpayers if Greeks were willing to co-finance it. In theory, Greek purchases could even help lower the nominal value of debt—if, for instance, Greeks bought debt whose maturity was far into the future. Tapping into the wealth of the Greek people, which is still substantial, could change the economics, politics and symbolism of the third bailout. It would also demonstrate trust in the most concrete way possible. For years, Europeans and the IMF have complained that Greek governments have never owned up to the programs that they committed to. What better way to own a program than to, you know, own it? 

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