LISTEN TO THE PODCAST:
Franklin Allen on the Eurozone Stalemate
Increasingly tense on-and-off talks between Greece and its creditors — represented by eurozone finance ministers — reached a new divide this week after Greece said it would turn aside an extension of its current bailout package. That set the stage for the expiration of the bailout package at the end of February.
Following that development, Greece has now asked for a new loan — rather than an extension on the bailout — that would run for four to six months. From Greece’s point of view, a new loan would allow some breathing room and also for some easing of the tough austerity measures that creditors want to continue. But so far, a number of eurozone member countries, led most strongly by Germany, are refusing to ease up on austerity measures or reduce the amount of debt owed.
So, what happens if there is no agreement this week, given that Greece and its banks reportedly would be close to being out of cash? In the immediate term, the European Central Bank may decide today or Thursday if it would support Greek banks with emergency funds.
To understand how the issues surrounding Greece’s finances may play out, Wharton Finance professorFranklin Allen looked ahead on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
“It’s now down to politics more than economics and finance, and that is the problem ,” said Allen, who is also a professor at Imperial College in London and head of its Brevan Howard Centre. “It’s tough for both sides to walk away saying they are winners. If decisions were based only on the economics, they could probably find common ground.”
Allen also said that if Greece does leave the eurozone, it would be the eurozone that by far has the biggest problems. “Greece would probably come out of it in the medium term okay, although there would be a lot of uncertainty in the short term.” In the medium term Greece could “default on [much of its] debt. They’ve got a primary surplus and a lot of uncertainty would be gone.”
But the eurozone would have big problems of political contagion, “with politicians in other countries arguing they may also leave and negotiating harder [for better debt and austerity terms].” So, a Greek exit “may well cause enormous problems for the other countries.”
Thus, both sides have strong leverage, in Allen’s view. He notes that “they may well not reach an agreement, and we may see something we have not seen for a while … the parties … simply walk away and do a ‘Grexit.’ That is outside what is expected, but there is a good chance it could happen here”
While it is most likely that tough negotiations will go on for four to six months, it is also possible a Greek exit could happen within days if there is a run on Greek banks. “Greece would need its own monetary policy [and currency] and start being able to provide liquidity assistance themselves,” Allen says.
“It’s now down to politics more than economics and finance, and that is the problem.”–Franklin Allen
The underlying problem is that the eurozone “is simply not growing. And the problem is that they have been making policy decisions based on growth forecasts which are ludicrously optimistic and completely out of line with what has actually happened. And this is the sense in which the policies have failed, and this is why the Greeks have voted to change them in a dramatic way.”
Allen also pointed out that when Argentina exited a dollar peg in 2002 (with parallels to Greece’s situation today), “it started growing again within a few months. And in a few years it doubled GDP.” Greece’s GDP is now 25% below where it was before the crisis began, “so there is potential to grow, and they might [leave the eurozone].”
An edited transcript of the conversation will be posted soon.
No hay comentarios.:
Publicar un comentario