BUSINESS EDITOR BRIEF: From Greece to Zim

GREECE is in turmoil. Europe is on edge.

On July 1 Greece defaulted on its 1,6 billion euro IMF debt and joined countries such as Zimbabwe, the Sudan and Somalia that have fallen behind on payments to the Bretton Woods institution.

Economists bet that Greece will most likely miss the July 20 deadline to repay a staggering 3,5 billion euro debt to the European Central Bank.

As Greece continues to be hounded by the dreaded trio of the IMF, ECB and EC (European Commission), who insist on heaping tonnes of conditionalities packaged as austerity measures as quid pro quo for a financial lifeline, the leftist government of prime minister Alexis Tsipras, shoved into power by an austerity-weary populace on January 20 this year, it has decided to stare down its creditors.

Not only that: Greece is not blinking.

This has earned Tsipras the admiration of popular political leftist and revolutionary, Commandante Fidel Castro.

But to neo-liberal economic thinkers, whose philosophy shapes the policies of Europe and the United States, Tsipras is a deliquent who must be reined at all costs.

Despite swallowing the bitter pill of austerity for five years, Greece’s health still flounders.

A quarter of the workforce is unemployed, more than three-quarters of bank loans are non-performing, tax payments are routinely postponed or avoided, and the government finances itself by not paying its bills.

Last week, Greece’s banks remained shut.

Unable to meet demand from depositors, as the ECB has restricted liquidity support, Greek banks have had to limit withdrawals from ATMs to 60 euros.

But since the ATMs are not dispensing 20-euro notes, depositors have had to be content with 50 euro withdrawals.

Wealthier Greeks are now hedging by hoarding electrical gadgets and jewellery.

They fear that the government might be forced to raid their accounts in order to pay some of its debts. Cash safes are also flying off the shelf as banks become abominable.

Does this sound familiar?

It should. It must.

Zimbabwe has been through this.

After a bout of sanctions from both the European Union bloc and the US, following a post-1999 fallout over the land reform programme — a period that coincided with a similar stand-off between the country and creditors such as the IMF and the World Bank — the local economy staggered. Unemployment, cash shortages and company closures peaked in the decade leading to 2009.

Write-offs and write-downs

But, most instructively, those who believe in the “big bang theory”, that life began as a result of an explosion, are of the opinion that a new philosophy, a new way will emerge out of the chaos that is currently engulfing Europe.

Already, there are economists who contend that any negotiated outcome between Greece and its creditors will not be both substantive and substantial, pushing instead for a debt cut or a debt write-off. In the words of French economist Thomas Piketty, “Everyone must do their part to ensure that Greece is sure. Intransigence, ideology and nationalism would lead us into a catastrophe. The idea that (the creditor) will get his money back by suffocating the debtor is crazy.”

Many continue to use the example of post-Second War Germany whose debt was cut by 60 percent by its creditors in London on February 27, 1953.

This subsequently led to Germany’s economic miracle as we know it today. That, coupled with massive investments via the Marshall Plan, have made the country Europe’s largest economy.

Ironically, Germany, which is Greece’s major creditor, is pulling all the stops to ensure that Greece toes the line and adopts another brutal round of austerity measures.

The Brady Plan

Those who are pushing for a debt write-off and a debt cut further point to the precedence of the successes of the Brady Plan, which rescued many Latin American economies from the precipice of a debt crisis. In fact, they believe that renegotiating debt, which involves extending the maturity of debts and lowering interest rates, can only lead the obligations to fester.

It took a decade or more from the onset of the Latin American debt crisis to the Brady deal.

The principles of the plan were developed by the then US Treasury Secretary Nicholas Brady in March 1989 to deal with a crisis that began in 1982. Most Latin American countries failed to service their obligations as they were confronted by high interest rates and low commodity prices.

Debt rescheduling and the attendant perceptions of uncreditworthiness continue to affect the economies. Brazil alone had six debt restructurings.

As a result, voluntary international credit and capital flows to these nations and their private sectors were affected. However, the Brady plan cut the debtor’s burdens by almost 36 percent.

Studies by Carmen Reinhart, who once worked for the IMF and Christoph Trebesch of the University of Munich found out that debt cuts can set economies on a sustainable future growth path. This is the same model that has to be applied to countries such as Zimbabwe, which owes the IMF an estimated US$109 million – relatively a meagre compared to Greece’s 1,6 billion euro debt.

There is scope to renegotiate with the country’s creditors for a debt cut simply because using the current terms the country would not substantially recover to be able to service its external debt, which currently stands at over US$7 billion. The country’s debt overhang has serious implications on creditworthiness, credit rating and overall relations with investors.

The private sector has had to access money at punitive interest rates from financiers.

Friendly investors like China have not been able to invest as much as they would like to as they heed such grim ratings. This is possibly why they insist on Sinosure (China Export and Credit Insurance Corporation) being central in underwriting most of the deals. Something has definitely got to give.

But one thing is certain: as Greece meets with the EU leadership today, the outcome of all this will define the future of creditor-debtor relations going forward.

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