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Home > Blogs > Ian Fraser > Willem Buiter: Reasons to be cheerful about Greece

Willem Buiter: Reasons to be cheerful about Greece

Greek debt | Willem Buiter: Reasons to be cheerful about Greece Ian Fraser

Given the recent blood-curdling, apocalyptic warnings about Greece (see Robert Peston and Andrew Lilico), it’s a relief to find there are some economists who take a relaxed, almost a nonchalant view of Europe’s sovereign debt crisis. Willem Buiter, global chief economist at Citi, is one such.

The Dutchman, a former professor at London Business School and author of the Maverecon blog, came out with a remarkably upbeat assessment at a briefing in Australia on Monday.

Since he spoke, there have been further reasons to be cheerful. Late on Tuesday Greece’s prime minister George Papandreou survived a “no confidence” vote -- boosting the chances that Greece will implement the austerity measures the EU is demanding in exchange for the next tranche of bailout money.

Buiter accepts that Greece will default (or "restructure" or "reprofile" its debt). He also believes that Ireland and Portugal will default "soon after". But he rubbishes the doomsayers such as Peston and Lilico who claim that a Greek default will be Europe's "Lehman moment", complete with concomitant financial meltdown and a banking crisis even worse than that of October 2008.

The Citi economist said that sovereign debt in Europe is "pure vanilla", without many derivatives, and that the countries at risk of default are “small nations” compared to a globally important institution like Lehman. Others now edging towards this line, especially if the defaults can be orderly, include the BBC Newsnight economics editor Paul Mason (see Greek default: end of the world or small patatas?)

Buiter also pointed out that when Lehman went bust it took financial markets largely by surprise; investors and national government have had time to ready themselves for a Greek default, even though some like the UK government of David Cameron do seem astonishingly complacent.

According to the coverage of Buiter's upbeat briefing in The Sydney Morning Herald and The Australian he also predicted that, after defaulting, Greece will go cap-in-hand to the IMF. The Aegean country will then make promises about further budget cuts (which Buiter said 'might happen') and privatisations (which he said 'won’t happen') in exchange for further loans. Greece will then avail itself of the European Financial Stability Mechanism -- the EU’s planned permanent bailout mechnanism, due to be ready by 2013 -- before fully restructuring its debt.

Buiter makes some good points on moral hazard. He insists that a "you-break-it-you-own-it" approach is required in Europe -- by which he means that institutions that lend irresponsibly, myopically or even recklessly must suffer the consequences of their own misjudgements (i.e. take the losses on loans that turn sour) and that countries that over-borrow must also take the pain, either through fiscal tightening or the fallout of a default.

Now this is an approach that I 100% endorse -- it's about taking responsibility for one's own actions, instead of always palming off one's problems on others (usually the taxpayer).

Buiter believes Greece should waste no time about coming clean about its losses, writing down its debt and "living with the consequences, suffering the pain", instead of forcing the rest of Europe to endure the "anticipation of a restructuring".

"The unfortunate consequence of the delay in restructuring is that more and more of the Greek and other insolvent sovereign exposure ends up on the books of official entities. It has unfortunate distribution consequences and unfortunate incentive implications, because it means those who made the unwise investment decisions are not paying the price for these decisions."

Citi has estimated that, if Greece were to restructure its debts today, about half would already be on the books of the European taxpayer rather than with the original creditors, and this would rise to 75% if postponed by a few years.

"That's something we probably have to live with this time, but we have to make sure in Europe that it doesn't happen again. That is, in the future, those governments -- and those creditors of governments and those creditors of banks that invest in those governments -- that those who break it indeed own it, rather than passing it on to the ever patient, ever suffering taxpayer."

(In my view, Buiter is wrong to describe taxpayers as "ever patient". One day taxpayers' are going to snap, their patience exhausted -- and that could occur some time soon).

Once the defaults occur, Buiter believes Greece, Portugal and Ireland ought to be able to return to the international capital markets (in terms of issuing new bonds) within a matter of months rather than years, as happened with Uruguay in 2003. This would be neat, but it almost sounds too good to be true.

I don't know whether the likes of Buiter and Mason are seeing the world through rose-tinted spectacles. I sincerely hope they're not. But, despite the Greek confidence vote on Tuesday, the risk of a messy financial implosion and a break up of the euro do remain very real. As Danny Gabay of Fathom Financial Consulting recently warned, the overall exposure that UK banks and other financial institutions have to Greek debt (if credit default swaps and other derivatives are included) may be as high £335bn.

Buiter ended by claiming it would be even worse if Greece chose to quit the EU, then default on its debts, then seek to recover by savagely devaluing the "new drachma". In such a scenario, he predicted Greece would face the "biggest deposit run that mankind has ever seen" followed by the collapse of its banks, then the collapse of its corporate sector. "By that time, Greece looks like Zimbabwe. I think it would be an economic catastrophe."

Further reading on Greece and economic recovery:

Tags: Andrew Lilico , Citi , Danny Gabay , David Cameron , economic recovery , EU , European Central Bank , European Financial Stability Mechanism , Fathom , Fathom Financial Consulting , George Papandreou , Greece , IMF , Ireland , London Business School , Maverecon , Maverecon blog , Newsnight , Paul Mason , Portugal , Robert Peston , Sunday Morning Herald , The Australian , The Sunday Morning Herald , UK , Willem Buiter , Zimbabwe
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