NEW YORK – Nothing illustrates better the political
crosscurrents, special interests, and shortsighted economics now at play in
Europe than the debate over the restructuring of Greece’s sovereign debt.
Germany insists on a deep restructuring – at least a 50% “haircut” for
bondholders – whereas the European Central Bank insists that any debt
restructuring must be voluntary.
In the old days – think of the 1980’s Latin American debt
crisis – one could get creditors, mostly large banks, in a small room, and
hammer out a deal, aided by some cajoling, or even arm-twisting, by governments
and regulators eager for things to go smoothly. But, with the advent of debt
securitization, creditors have become far more numerous, and include hedge
funds and other investors over whom regulators and governments have little
Moreover, “innovation” in financial markets has made it
possible for securities owners to be insured, meaning that they have a seat at
the table, but no “skin in the game.” They do have interests: they want to
collect on their insurance, and that means that the restructuring must be a
“credit event” – tantamount to a default. The ECB’s insistence on “voluntary”
restructuring – that is, avoidance of a credit event – has placed the two sides
at loggerheads. The irony is that the regulators have allowed the creation of
this dysfunctional system.
The ECB’s stance is peculiar. One would have hoped that the
banks might have managed the default risk on the bonds in their portfolios by
buying insurance. And, if they bought insurance, a regulator concerned with
systemic stability would want to be sure that the insurer pays in the event of
a loss. But the ECB wants the banks to suffer a 50% loss on their bond
holdings, without insurance “benefits” having to be paid.
There are three explanations for the ECB’s position, none of
which speaks well for the institution and its regulatory and supervisory conduct.
The first explanation is that the banks have not, in fact, bought insurance,
and some have taken speculative positions. The second is that the ECB knows
that the financial system lacks transparency – and knows that investors know
that they cannot gauge the impact of an involuntary default, which could cause
credit markets to freeze, reprising the aftermath of Lehman Brothers’ collapse
in September 2008. Finally, the ECB may be trying to protect the few banks that
have written the insurance.
None of these explanations is an adequate excuse for the
ECB’s opposition to deep involuntary restructuring of Greece’s debt. The ECB
should have insisted on more transparency – indeed, that should have been one
of the main lessons of 2008. Regulators should not have allowed the banks to
speculate as they did; if anything, they should have required them to buy
insurance – and then insisted on restructuring in a way that ensured that the
insurance paid off.
There is, moreover, little evidence that a deep involuntary
restructuring would be any more traumatic than a deep voluntary restructuring.
By insisting on its voluntariness, the ECB may be trying to ensure that the
restructuring is not deep; but, in that case, it is putting the banks’
interests before that of Greece, for which a deep restructuring is essential if
it is to emerge from the crisis. In fact, the ECB may be putting the interests
of the few banks that have written credit-default swaps before those of Greece,
Europe’s taxpayers, and creditors who acted prudently and bought insurance.
The final oddity of the ECB’s stance concerns democratic
governance. Deciding whether a credit event has occurred is left to a secret
committee of the International Swaps and Derivatives Association, an industry
group that has a vested interest in the outcome. If news reports are correct,
some members of the committee have been using their position to promote more
accommodative negotiating positions. But it seems unconscionable that the ECB
would delegate to a secret committee of self-interested market participants the
right to determine what is an acceptable debt restructuring.
The one argument that seems – at least superficially – to
put the public interest first is that an involuntary restructuring might lead
to financial contagion, with large eurozone economies like Italy, Spain, and
even France facing a sharp, and perhaps prohibitive, rise in borrowing costs.
But that begs the question: why should an involuntary restructuring lead to
worse contagion than a voluntary restructuring of comparable depth? If the
banking system were well regulated, with banks holding sovereign debt having
purchased insurance, an involuntary restructuring should perturb financial
Of course, it might be argued that if Greece gets away with
an involuntary restructuring, others would be tempted to try it as well.
Financial markets, worried about this, would immediately raise interest rates
on other at-risk eurozone countries, large and small.
But the riskiest countries already have been shut out of
financial markets, so the possibility of a panic reaction is of limited
consequence. Of course, others might be tempted to imitate Greece if Greece
were indeed better off restructuring than not doing so. That is true, but
everyone already knows it.
The ECB’s behavior should not be surprising: as we have seen
elsewhere, institutions that are not democratically accountable tend to be
captured by special interests. That was true before 2008; unfortunately for
Europe – and for the global economy – the problem has not been adequately
addressed since then.
Joseph E. Stiglitz is University Professor at Columbia
University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global