Europe: Falling off the Volatile Bull?

For quite a long time I’ve been arguing in favor of writing off a proper amount of the Greek debt, since Greece is insolvent, and not just having problems with liquidity, like some other European countries. And now – it’s quite late, but still not too late – it looks that the European Union at the October 26th, 2011 summit* at last will acknowledge that the Greek debt must be cut and cut it will be.

It’s happening this late for several reasons – one of them, and maybe the most important, which won’t be officially admitted, is the time needed for transferring as much as possible the outstanding obligations from private banks to public institutions, that is the European Union, European Central Bank, and the International Monetary Fund. Now, when the so-called troika is in possession of a substantial share of the debt, it can be written down because now it makes such operation less painful for commercial banks. Of course, it’s going to happen at the cost of – who else – the taxpayers’ money. Yet, there are still three major challenges.

First, how to sell this costly action (although much more reasonable than alternative chaotic default) to the people, so often called “the electorate”. It is especially difficult politically in France and Germany – two countries with the banks most exposed for losing money lent to Greece, and countries where next year there are elections for president and parliament.

Second, since just a conviction by logical arguments is not going to work, how to enforce particular banks to accept a loss of certain money they’ve lent so recklessly to a country living beyond its own means. They must pay the price for such mismanagement, since it’s been the banks’ management and supervising boards’ own doing. The clients of the banks, first of all the depositors with their savings, and not the shareholders and managers should be protected. The President of the EU, Manuel Barosso, is absolutely right for calling for not paying any dividends and bonuses in cases of bailed-out banks. Will it happen? This will be another test for economic common sense, political honesty and tough commitment to the right cause.

Third, a part of the loss of the commercial banks must be compensated by the EU and the governments, mainly the French and the German. And again, it’s going to occur at the costs of taxpayer money. What part; by what techniques; under what conditionality? These are as much political as technical questions, which must be answered as soon as possible, better in a matter of days or weeks, and not again in months or quarters.

And – which should go without saying – the Greek people ought to accept unavoidable austerity measures bringing their standard of living in line with their economic abilities. That means that they must accept a certain fall of income and welfare. I’m sure it will be easier for them to understand and agree if the outside world, mainly the rest of Europe, will come to its rescue with partial forgiveness of nonperforming and non-payable debt.

So, what’s a proper portion of the debt to be reduced? If the advice to cut it down was followed earlier in the year – as I’ve argued here (see my posts:,,, and and elsewhere, including my comments published by “The Economist” and “Financial Times” – a reduction by half could work. Now I think it should be more, about two thirds. The trimming of the obligations must bring the debt over GDP ratio down to a manageable 50 percent. Otherwise, it doesn’t make much sense.

Let’s do it now, at the long-waited so-called decisive meeting of the EU leaders. Otherwise, Europe may be not be able to ride the capricious bull much longer, which is ever more volatile due to the enfolding crisis…

*When I drafted this note, I was struck one more time while reading the BBC World service: “The EU’s 27 finance ministers and the 17-nation Eurogroup will now not meet on Wednesday, although a full emergency heads-of-government summit will happen. This could mean a delay to final announcements on solutions.” ( Yet another joint delay instead of joint action? If so, I’m afraid Europe may be not able to ride the volatile bull and fall even deeper in the abyss of economic and political crisis…