Default, and other dogmas
May 13th 2010
The experience of ex-communist countries in the 1990s undermines many of the claims now made about Greece
For anyone from the ex-communist world with a medium-term memory, the frantic efforts under way to save Greece (and the other wobbly southern members of the euro zone) are rather puzzling.
For a start, what is so bad about default and restructuring? In the 1990s Russia restructured $32 billion worth of Soviet debt into PRINs and IANs (both are now stored in the Museum of Financial Archaeology and may be viewed on application to the curator). In 1998 it defaulted on those debt instruments. People said Russia’s financial credibility would never recover. One banker said he would rather eat nuclear waste than invest in Russia again. But within a couple of years, Russia was flavour of the month.
It was the same story with Poland, which restructured its debt after 1989. Thanks to heavy politicking from America, the freely elected authorities were allowed to swap sovereign debt incurred by the communist regime into less onerous “Brady bonds” (stored in the same museum, also viewable on application). Hungary, which did not have the same backing from America, has had to pay its debt in full. That depressed its growth rate in the 1990s and meant lower government spending and higher taxes. Hungary should have benefited from this sacrifice by gaining a better credit rating. It didn’t. Funny things, markets.
The moral is that investors’ memories are short. If Greece were to restructure its debt, it would not take long for greed to trump fear and for capital to start flowing again.
A second piece of dogma undermined by the experiences of the ex-communist countries is that leaving a common currency area is all but impossible. The Czech and Slovak korunas separated without even a ripple of disturbance. The Yugoslav dinar disappeared in a puff of hyperinflation, but the currencies that succeeded it did pretty well almost from the word go. The death-agonies of the Soviet rouble were painful, but now the Russian currency is one of the most solid in the region. Dig out the drachma from the museum and it may float better than anyone expects.
But perhaps trumping these feelings of confusion is a kind of envy. Greece is benefiting from the kind of support of which the ex-communist half of Europe could have only dreamed in the 1990s. Imagine for a moment that Greece was an EU candidate country, rather than a full member of both the union and of the euro zone. To judge by the way Turkey has been treated in recent years, Brussels would be demanding not only a leaner public sector but a different political system: for example, secularisation of church-state relations, greater minority rights or a climbdown on issues such as the names the country calls its neighbours.
The big difference, of course, is that in 1981, when it joined the then EEC, Greece was just one small country emerging from authoritarian rule (and from a military regime that had been partly supported by the West). In 1989, the sentiment was different. The west Europeans felt intimidated by the ill-dressed needy hordes in the east and preferred to slow things down rather than speed them up. That led to a long process of negotiations with phoney benchmarks for reform and adoption of EU standards. That was a great business for bureaucrats and consultants. But at the end the decisions on which countries to admit were almost entirely political. Funny thing, politics.
The lesson of Greece is that faced with a big, urgent issue, Europe can get its act together. What will it take for Ukraine or Turkey, both of which arguably deserve EU membership just as much as Greece does, to gain the same kind of attention?