Local view for "http://purl.org/linkedpolitics/eu/plenary/2011-05-11-Speech-3-609-000"
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"en.20110511.35.3-609-000"2
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"Mr President, I will focus on one issue only because I need my five minutes for that.
Let us recall that in the final analysis, fiscal solvency requires stabilising and then reducing the government debt ratio – i.e. achieving a primary structural surplus and achieving a debt-stabilising level.
Greece is still living beyond its means, and the key is that Greece has to start earning more than it consumes and also be able to pay the interest rates on its debt burden.
That is the primary structural surplus that Greece needs, and debt restructuring would not solve this very fundamental fact. Therefore, at the end of the day, the main determinants over the solvency of Greece are of a political and social nature – the consistent rigour to keep the primary surplus stable at a high level of around 5% of GDP for a long period of time.
We have examples of this. Belgium successfully did so in the 1990s for almost a decade. Moreover, six EU Member States have been able to maintain a primary surplus of over 4% for at least four years, so it is not impossible. It is certainly very challenging, but it has been done before and it is doable also for Greece if there is the political will and unity in the country. This is the only way for Greece to avoid much worse alternatives.
We really are at a critical juncture concerning the future of Europe. This debate is about the sovereign debt crisis. It has implications for the euro, for the future of Europe. You know this very well. I must say that I am extremely concerned about the divergence in the national political debates we have heard recently, which have also been reflected in this House. There is political fatigue in central and northern Europe about supporting the countries in trouble; there is reform fatigue in southern Europe about carrying out the necessary reforms. We need to find the energy together to beat this fatigue. We need to build bridges over these divergences in order to save Europe, and we need to make the necessary decisions to avoid another, even worse crisis, and to enable the whole of Europe to recover from this extremely serious financial crisis that we have experienced in the last years.
In recent weeks, and today in this House, many voices have spoken in favour of debt restructuring in Greece. It sounds very easy and neat. However, I must say that the proponents of sovereign debt restructuring seem to ignore the potentially devastating implications for financial stability in the country itself and in the euro area as a whole, and the consequences and ramifications for economic growth and employment.
Let us think about what the consequences of debt restructuring could be. Of course, we are talking about a counterfactual situation, as are the proponents of debt restructuring, but we have enough understanding of the channels of impact on financial stability and economic activity to make a likely and most possible scenario. This is how it could very likely turn out.
Bondholders would take a big hit – i.e. households through their savings instruments like pension savings, as well as institutional investors such as pension funds and insurance companies. Banks would also bear the cost. From last year’s bank stress test exercise, we know that the Greek banks hold EUR 48 billion of government securities, Greek Government bonds. What would happen? A restructuring of sovereign securities would seriously erode their capital base. For instance, even a 30% haircut would mean that a large part of the banking system would end up under-capitalised, while a 50% haircut, which many have advocated, would imply that a large part of the Greek banking system would simply become insolvent.
Thus, a debt restructuring in Greece would have major consequences on the soundness of the banking sector in Greece, as well as on any banks having exposure to Greek securities.
Now, I do not love banks, nor do I do my job in the first place in order to save them, but it is a fact that such a major banking crisis would lead to a massive credit crunch. It is not a kind of theoretical virtuality. It is a very likely result. A massive credit crunch. Moreover, through rating actions, the collateral pool at the disposal of the Greek banks would most likely be wiped out. It would melt down. A massive credit crunch, possible bank runs, a deposit freeze and/or capital controls could well be part of the consequences. What is absolutely sure is that the contraction of the economy would be unprecedented in Greece.
Let me recall that Argentinian GDP collapsed by almost half over five years. Would that help Greece or Europe? I doubt it. Even such a severe haircut as 50% would not reduce the debt ratio below 100% of GDP, assuming that the international creditors, like the euro area Member States or the IMF, were excluded from this haircut.
Greece still has a large fiscal deficit which it has to finance. Who would be ready to lend to Greece the morning after it wiped out 70% or 50% or 30% of previous investors’ financial wealth? Who would be ready to lend to Greece the morning after?
Debt restructuring would cut Greece’s access to financial markets for a very long time, and the goal of the EU/IMF programme is indeed a relatively rapid return to the markets to finance the Greek sovereign debt so that European taxpayers do not have to guarantee loans to do that. That is the goal of this exercise."@en1
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