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Greek Band-Aids: Less Effective, Rising Cost

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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International Monetary Fund Managing Director Christine Lagarde correctly said last week that the protracted negotiations between Greece and its official creditors required "a comprehensive approach, not a quick and dirty job.” She was responding to the leak of a fund document that highlighted the pressure to craft yet another stopgap that only temporarily averts a meltdown, and she was also emphasizing the need to finding a lasting solution to the crisis that continues to elude the parties.

QuickTake Greece's Fiscal Odyssey

There are several reasons the “quick and dirty” approach has been the norm for Greece’s interactions with its European partner governments, European institutions and the IMF. And the results haven't been all bad.

This piecemeal muddle-through approach had the potential to buy time for Greece and the euro zone to pivot from the urgency of crisis management to thoughtful crisis resolution and effective crisis prevention. It allowed both sides to pursue the type of (internal and regional) political consensus and compromises needed for a comprehensive solution. It also bought time for all sides to erect the internal defenses that would be required if the hopes for a positive outcome gave way to the pressing reality of a more disorderly resolution, such as a forced Greek exit from the euro.

But too little was achieved during this transition period, and it has proved a costly bridge to nowhere.

Five years of quick and dirty responses haven't eliminated the significant gulf that remains between Greece and its creditors, both when it comes to interpreting the past and agreeing on the future. And the muddling through has had mounting costs:

  • A significant amount of potentially unpayable Greek debt has been transferred from private creditors to public balance sheets underpinned by European taxpayers. Many of these private entities had been paid handsomely for their willingness to take on the sovereign credit risk of Greece and, thanks to generous bailout funding from the official sector, quite a few have been able to exit without much cost.
  • Failing to see much sustainable improvement, Greek citizens have been pulling their cash out of banks. This has contributed to wider capital flight that sucks operating oxygen out of the country’s economy and puts a growing number of institutions at risk of bankruptcy.
  • Greece's deep and persistent economic problems have caused significant human distress and worsened the structural impairments to future economic recovery and prosperity.
  • Negotiating tensions between Greece and its creditors have been compounded by coordination difficulties among the creditor group itself (what used to be called the Troika: the European Central Bank, European Union and IMF). As a result, Europe has devoted too much time to endless arguments that diverted attention from the important task of completing the foundations of the region’s historic integration project.

The cost-benefit calculation of the “quick and dirty” approach has become less favorable and now approaches acute levels. Yes, official creditors such as the ECB and IMF are under even greater pressure to make new loans to Greece if they hope to be repaid their prior loans. But such financial engineering no longer fools anyone. Specifically, this stratagem will do little to unleash new incremental capital, reverse the deposit withdrawals from Greek banks or improve the daily reality of a growing number of Greek citizens deeply affected by the crisis. Meanwhile, faith in the ability of the creditors to solve problems will erode further, adding to complicated internal and regional political dynamics.

Lagarde's plea for a comprehensive approach reflects a growing urgency as the inefficiency and cost of the successive Band-Aids have become clear. Yet with the odds favoring another muddle-through or -- as is increasingly likely -- a messy Graccident, she faces a considerable challenge. Meeting it will require much greater cooperation, realism and vision from Greece and its European partners -- and quickly.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net