Greece's Debtors Will Have 'To Take A Haircut'

The Greek parliament will vote on more austerity measures next week. European leaders are demanding sacrifice as a condition of giving aid to Greece. In theory, all the debate involves avoiding default. Zanny Minton Beddoes, of The Economist, talks Steve Inskeep about the options for Greece to default on its debt.

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: fear of disastrous ripple effects if Greece should default on its massive debt. Zanny Minton Beddoes, of The Economist magazine, argues that's not really the question. The issue is not whether Greece defaults. The question is how.

The scenarios that are laid out for Greece at the moment, are either they pay off their debt or there's utter chaos that could spread all they way around the world. Are those really the only two options?

ZANNY MINTON BEDDOES: I don't think they are, actually. I think there are several options. In the short term, the Greeks pass their austerity budget next Tuesday. The Europeans then lend them a bit more money, kick the can down the road a bit, if you will, but don't solve the basic problem - which, as you say, is that they've got debt that they can't pay.

But in terms of long term solutions, Greece is deeply uncompetitive. It's an economy which can't really compete within the European Union right now. And I think it's quite clear that Greece cannot possibly repay its debts as they stand. So assume the Europeans are not willing to completely pay it off for them, there will have to be some kind of restructuring, some kind of default, if you will.

: OK, let's talk about that terrifying word, default. What do you mean by that?

MINTON BEDDOES: Well, it's a terrifying word, but let's think about it because people use default to mean all manner of things. One is the chaotic one. Greece doesn't have any money left, has says to its creditors, sorry, you were expecting a bond repayment next week, we can't do it. Their banking system seizes up. Total catastrophe, possibly they have to leave the Euro, chaos.

But there is another one, which is also a default, which is an orderly restructuring of Greek debt. Greeks go to their creditors, say look, we can't pay, let's do a debt exchange where you reduce the value of the debt, you take a hit, we agree to pay what we can...

: The phrase that's been used in the United States in similar situations in recent years, is that the creditors take a haircut.

MINTON BEDDOES: Absolutely.

: They give away part of the debt and they try to collect what they can.

MINTON BEDDOES: The creditors are going to have to take a haircut. But the problem in Europe is that the Europeans are torn between two contradictory things. On the one hand, they really, really don't want the creditors to take haircut, because large numbers of those creditors are European banks. So they say, absolutely no default - constantly.

On the other hand, many people in Europe, particular in Germany, are increasingly unwilling to shovel money to the Greeks to pay off their creditors. And you can't have both of those. Something, at some point, has to give.

: What you're telling me is that when German taxpayers, for example, are asked to shovel money to Greece, they're not really saving Greece, they're trying to save some German bank that has invested in Greek debt and wants to get paid back. That's what's really happening.

MINTON BEDDOES: That's absolutely what's really happening. And one of the very interesting things in Europe, is it's not been explained in that way. They really need you in Europe, frankly, letting this out.

: Well, there's an NPR station in Berlin, so (unintelligible).

MINTON BEDDOES: Well absolutely, because the average German taxpayer thinks that they, hard working, frugal, prudent Germans, are bailing out a load of profligate Greeks. And they naturally feel pretty angry about doing that. No one has really laid out to the Germans, that actually, in doing that, they are in fact helping themselves; and that the consequences of a chaotic Greek default, of the sort that we talked about, just now, would actually be pretty bad for Germany itself.

: To some extent, is this crisis - I don't want to say manufactured, precisely; but to some extent, does everybody understand how this has got to work out? European taxpayers are going to lose something. European banks are going to lose something. The Greeks are going to lose something and eventually the numbers will be made to add up.

MINTON BEDDOES: Manufactured is not exactly the word I would use, but are we in an unnecessarily complicated and dangerous position, yes. And we're there because of various factors. First of all, because the Europeans have not been willing to get to get to grips with the basic problem, which is exactly as you've laid out - which is that there is a debt that is unpayable and the costs, essentially, have to be divvied out - some taken by the Greeks themselves, some taken it by European taxpayers, ad so-forth.

The Europeans put Band-Aid upon Band-Aid upon Band-Aid. Then they've pretended for a long time that this is a temporary problem and if you just tied them over with a few loans, they'll be fine. And that's clearly not the working. And they're seeing the consequences of what happens when you keep failing to take the big decisions and try to put them off. Things get worse. This is just not something where there is some fantastically easy solution and it will all be over in a trice. But it needn't have been as complicated as it is now, and certainly, the fact that we are in this, you know, very dangerous position, is, I think, to use your word, manufactured by European incompetence.

: Zanny Minton Beddoes is economics editor of The Economist magazine. Thanks for coming by.

MINTON BEDDOES: Thank you.

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