It’s a party! And I’m the host. Granted, it’s a sovereign crisis party that only six people in the world want to attend, but one of them is Anna Gelpern (American, law) back for another guest post. If you’re in a public setting, such as a meeting, where laughing out loud would be inappropriate, then stop right here. Otherwise, sally forth my fellow Greek crisis aficionados and read the funniest post to emerge from the mess so far.
Gelpern: All right already, I feel like κραπ enough without this! Look, my basic problem is that I just do not see the endgame. Let’s say Greece announces a debt exchange today at 50 cents on the dollar, and let’s say it takes six months to carry off. What happens to the Greek banks? What happens to the German banks, the French nonbanks, the Belgian pet shops? What happens to Spain, Portugal, Ireland, the Euro? Do we even know who wrote the CDS on this stuff? What if it is some crazy corner of Pitygroup? What if it is Grannie Mae? What if it is China? What if China goes down????
Γκελπερν: This is the problem with you bailout people—always the same scare tactics—contagion, externalities, extreme uncertainty, Alien landings. And then the fat cats who made stupid investments and fools who lived beyond their means all get rescued, and us regular folks get stuck with the bill. The cats and the fools need to take their lumps so they do not act stupid the next time. Ever heard of moral hazard?
Gelpern: You are speaking in generalities. “You always” is not an argument.
Γκελπερν: And you have been blowing scare smoke. You want specific, here’s specific – Ρουμπίνί says, “at the onset of its crisis, Argentina’s budget deficit, public debt, and current-account deficit (as a share of GDP) were about 3%, 50% and 2%, respectively. Those ratios for Greece are far worse: 12.9%, 120% and 10%.” There is no way Greece can avoid restructuring. So why not do it now for 50 cents? You are delaying the obvious only to give the creditors a 75 cent haircut, not to mention six months to three years of untold pain for the Greek people – all for nothing.
Gelpern: We are both practicing economics without a license. Κρουγκμαν says the Greeks suffer no matter what. I am not saying 150% is sustainable, but let us not pretend there is a magic number that tells you whether a country can pay. If there were, all the real economists would not be arguing about sustainability and preconditions. I just worry that 50 cents will be more like 90 cents if everything spins out of control. We have never had this sort of thing happen in a serious currency block or with a G3 currency. … Besides, there is a big difference between six months and three years. You were short Argentina in 1993. They defaulted in 2001.
Γκελπερν: So what is your endgame, exactly? Let me guess. Recapitalize the banks, amend the EU treaties to get a common fiscal authority and financial resolution regime, wait until the markets are pristinely calm, then ask nicely for a 75% haircut? And what do you think the creditors will do in the meantime?
Gelpern: You are right, it seems disingenuous. But my preconditions are no less realistic than the next guy’s, and they are good policy besides. Just read the small print—everyone is assuming rational behavior under standard temperature and pressure! Policy makers do not get that luxury; we do not give them enough credit.
Γκελπερν: Snap out of it. Tell me what should happen.
Gelpern: Look, I’m sorry. I think the trillion-dollar caper is probably the right thing to do, for both of us. It makes a restructuring easier if you decided to go for it—even if I still don’t know who could go down with Greece, I know there is enough money to insulate whoever it might be. And I am sort of impressed with the IMF angle. This must mean Asia and the rest are on board.
It helps you, but it also makes it less likely that Greece will have to default. Bonds don’t run—they sell, drop or mature. And if there is a sell-off, the guys who buy Greece at a discount now might not mind a haircut quite as much later. So you are getting a bit of relief by the back door.
Γκελπερν: Is this worth a trillion dollars?
Gelpern: Well, I do not think they will actually spend anything like a trillion. Remember all those “second lines of defense” that never got drawn?
Γκελπερν: Remember AIG?
-- Anna Gelpern
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