Greece has no future within the eurozone

by Sir Martin Jacomb

Financial Times
July 4, 2011

The Greek parliament has voted, but the crisis goes on. The European Union’s current policy has been driven by the political imperatives of preserving the euro and avoiding another banking crisis – but it will not yield an enduring solution. The EU’s future depends on enabling its poorest member countries to regain their competitiveness – and this requires a very different approach.

Everyone knows that lending more money to someone who is already heavily indebted, and has few realisable assets and woefully inadequate income or earning power, creates problems. Putting the repayment date off for 30 years simply ensures that no one in authority today will be around when the time comes.

Moreover, it is plain that a large part of the new lending to Greece, which obviously cannot possibly be repaid by Greece, is in substance going to repay Greece’s existing creditors. New official lending is public (taxpayers’) money, and it is going to bail out Greece’s creditors; in particular banks with exposure not yet written down. There is certainly a need to prevent another crisis. Hence the motive for the proposed “rescue”: to prevent banks, including the European Central Bank, being hit by losses large enough to be embarrassing.

So the process of putting off the evil day is likely to continue. Anyone still holding or buying Greek government debt is relying on this; and there are indeed some people buying because the discount on Greek bonds is now so large that the price has almost arrived at a market clearing level and may be thought worth a speculative bet for those who believe the policy of postponing default will continue.

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