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Greece Faces Debt Deadlines as Financial Markets Watch the EU

February 16, 2010 at 12:00 AM EDT
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Greece has one month to take urgent measures to rein in its debt problems and less time to share information about its currency swaps, EU finance ministers said Tuesday. Jeffrey Brown talks to finance experts Scheherazad Rehman and Simon Johnson.

GWEN IFILL: Now: continuing fears over the economic ripple effects starting in Greece and spreading to the rest of the world.

Jeffrey Brown has the story.

JEFFREY BROWN: Amid what’s seen as the biggest test of Europe’s single currency since the inception of the euro 11 years ago, finance ministers in Brussels today told Greece that it must take urgent measures to rein in its huge debt problem. The ministers set a one-month deadline for new actions.

ANDERS BORG, Swedish finance minister: Our view is that the program from the Greece government is not enough. We need more concrete steps to regain credibility in the markets, otherwise, that this will drag out.

JEFFREY BROWN: Last year’s global recession exposed the depths of Greece’s economic trouble. According to recent news reports, Wall Street firms had for years helped mask the situation with complex financial instruments, while the Greek government hid the full extent of its problem.

A new government has vowed change, pledging to dramatically reduce its budget gap this year.

GEORGE PAPACONSTANTINOU, Greek finance minister: The Greek government has already started implementation of its stability and growth program, which exactly deals with the problem of the excessive deficit. We are encouraged by the fact that we are moving quite fast.

JEFFREY BROWN: But those austerity measures have already spurred demonstrations in Greece. In Athens today, ports were still, as customs officials began a three-day strike to protest pay cuts. And concerns that the port shutdown would lead to gasoline shortages prompted long lines at stations.

With the value of the euro falling, Greece’s problems are a threat to the entire so-called Euro Zone, the 16 European Union members that converted to the euro as their sole currency.

The European Central Bank sets monetary policy for these countries, but individual nations make their own fiscal policy. And the rest of the world is watching carefully as well, as world markets, including Wall Street, have been shaken in recent weeks by events in Europe.

And, for more on all this, we turn to Scheherazade Rehman, director of the European Union Research Center, and professor of international finance at George Washington University, and Simon Johnson, former chief economist at the IMF. He’s now with the Peterson Institute for International Economics and a professor at the MIT Sloan School of Management.


SIMON JOHNSON, former International Monetary Fund chief economist: Hi.

SCHEHERAZADE REHMAN, professor of international finance, George Washington University: Thank you.

JEFFREY BROWN: Simon, help people understand what’s going on. This is both a local problem in a particular country, but something more.

SIMON JOHNSON: Absolutely. This is a serious fiscal problem, a budget problem, if you like, in — in Greece, one European Union country, but also a country that shares the euro, a currency, with 15 other countries.

And, so, as Greece has its problems, as the Euro Zone can’t deal with them, there’s a lot of fear about the Euro Zone itself. Will it break up? Will it hit other problems? Will Portugal and Spain, for example, be affected?

JEFFREY BROWN: What is the connection? Make the connection for us. Why does what — Greece gets itself in trouble. Why does that affect the rest of the Euro Zone.

SCHEHERAZADE REHMAN: Well, because they’re sharing the same currency. And, if this country goes down, it will reduce the value of the euro vis-a-vis other major currencies. And, so, therefore, you can’t let one country falter, not in this zone.

I think the real danger really is outside the Euro Zone, which is the other countries, which are not using the euro, because that’s where the other shoe is waiting to fall.

JEFFREY BROWN: Other countries such as?

SCHEHERAZADE REHMAN: Such as Hungary, that has already gone to the IMF, Romania, Latvia.

JEFFREY BROWN: You started with a domino. So, that’s a bit of a domino effect. You started that. How widespread? I mean, you have argued that this could affect the global recovery.

SIMON JOHNSON: Certainly, it can affect the global economy and our attempts to get a recovery going, particularly if it affects banks around the world.

I would stress right now we don’t see the dominoes falling. We’re worried about it either going to the east or going to the west, working around the so-called Club Med set of countries. Of course, Ireland has problems, and the United Kingdom also has problems with its budget and with investor confidence. So, the situation right now in Europe is really quite fragile.

JEFFREY BROWN: But take us back a little bit, I mean, to the idea of — the original idea of the single currency, was to do what? This sort of thing wasn’t supposed to happen, right?

SCHEHERAZADE REHMAN: Well, this was a political project at the — from the very beginning. And it obviously has enormous economic benefits, since 65 percent of all trade inside of Europe is intra-Europe trade. So, you have a single currency. It makes it much more efficient.

But the idea was only five or six countries were originally supposed to join, countries that look alike, that can withstand a shock, that there is no asymmetric shock to one country. But, in the end, the ball, political ball, got moving, and 11 countries joined. And now there are 16 countries, Slovenia, Slovakia, which perhaps don’t have any business being in a union with Germany, with France, because the real fault lines in a regional block like this don’t come when times are good, but when times are bad.

And we’re facing the worst crisis in 60 years, this financial crisis, and the fault lines are showing, clearly.

JEFFREY BROWN: What would you add to that? I mean, it was controversial at the time, right, to go to the euro.

SIMON JOHNSON: Absolutely.

You could actually say that the process of European naturally should have gone east — west to east. Poland and countries, Czech Republic, should have been brought in. But they couldn’t because of communism. So, instead, it went north-south. It brought in these southern countries with very different characteristics.

They promised they would become more like the north. And perhaps that was an honest, legitimate promise. But it didn’t happen. Greece has a fundamentally different economy from that of Germany. They’re linked by a common currency. That is an enormous source of tension and difficulty right now.

JEFFREY BROWN: But does the current crisis, is that stirring some thinking that maybe all this was not a good idea to begin with?

SIMON JOHNSON: There’s a lot of reexamination of the Europe project and the Euro Zone project, particularly in Germany right now.

The German voters don’t want to bail out Greece. They’re saying, why have we been subsidizing so many countries for so much time? And I think it comes back to the legacy of World War II. And it comes back to, how does Germany feel vis-a-vis its neighbors? Do they want to rip up that contract?

They spent 50 years building this and building better relationships with all their neighbors. I think, in the end, they don’t. In the end, they stick with the Euro Zone, they stick with the European Union. In the end, they give a pretty generous bailout, I think, to Greece. They stop the damage from spreading. But it’s very annoying. It’s very expensive. And it may lead to further problems down the road, if it encourages other countries to…

JEFFREY BROWN: Well, Simon used that word bailout a couple of times.


JEFFREY BROWN: What does that mean?

SCHEHERAZADE REHMAN: Well, let’s — let’s backtrack a little bit.


SCHEHERAZADE REHMAN: I think, to just answer your other question, there is no going back. Once the euro…

JEFFREY BROWN: No going back to before…

SCHEHERAZADE REHMAN: There is no before after this. This is it. The euro was created. There’s no going back. And once a country joins, it’s in there.

The bailout has to happen. Look, Germany understood when it came into this that, if something serious happens, it’s going to bear the brunt of this, and with France, to some extent. They don’t like it, and, especially, again, we’re in the midst of a financial crisis. Everybody is hurting.

If this happened perhaps, you know, five years ago, it could have been more manageable. But now no taxpayer wants to use — see his tax money not only being paid for the local banks’ bailout, but foreign bank bailouts.

JEFFREY BROWN: Because they are being asked to deal with their local problems.


I mean, if you look at the real numbers, you’re looking at almost $33 billion worth of bailout money coming to Greece, if it needs to really get out of trouble. And that’s a lot of money.

JEFFREY BROWN: Do you see that? I mean, do you see this transfer happening, because — mostly because there’s no choice?

SIMON JOHNSON: Exactly. Where do you go? If Greece leaves the Euro Zone, that will be a disaster for Greece and for many other countries. If Germany were to leave the Euro Zone, which some Germans are seriously proposing, that would be very bad for all their neighbors.

JEFFREY BROWN: A disaster because what? I mean, what happens if they just say, we don’t want this anymore?

SIMON JOHNSON: Well, if the Greeks say they don’t want — if the Greeks say they don’t want it, then they pay a lot more — a lot higher interest rate on all their government debt. They have a lot of debt. It makes all their problems worse. And they have their own currency that then collapses.

If Germany pulls out, it probably will be OK for Germany. Germany is a very tough, resilient country. But all the neighbors around them, all the countries that they have brought with them over the past 50 years, they’re all going to be adversely affected.

I really don’t think the German leadership or the German voters, when it’s put to them like this, are really going to go down that route.

JEFFREY BROWN: In the meantime, though, these austerity proposals in Greece are going to hurt a lot, right?

SCHEHERAZADE REHMAN: Well, politically, economically, financially, you know, the Greek workers are screaming, because they’re being asked to pay — now take pay cuts to again bail out the banks. And, again, it’s the whole issue of bailing out the banks.

But the bottom line is, there’s no free lunch. Germany, France and the rest of the Euro Zone countries are not going to give any money to the — Greece, Greek government, unless there are serious cuts, increase in taxes. And there’s going to be some serious pain on the ground.

JEFFREY BROWN: Fill in a little bit more why the rest of us care, right?

JEFFREY BROWN: I mean, as I said, the markets have been rattled over the last few weeks. Now, why is — why are Wall Street markets so aware and so concerned about what happens in Greece?

SIMON JOHNSON: Well, our economy is obviously somewhat fragile right now. We have been selling quite well to the rest of the world over the past year. Exports were a strength.

That’s much harder to continue doing if the dollar strengthens. The dollar is strengthening right now because this major other currency, or the euro area, has got an enormous amount of uncertainty and volatility in all these dimensions.

So, the dollar gets stronger, that’s not good for our exports, doesn’t help our growth. And the big wild card is problems in the financial sector. Our big banks don’t have a lot of capital. They’re not well-provisioned against a further major shock. We thought we were in the recovery phase.

If this scenario in Greece plays out, with the trade unions in the streets and gasoline shortages and so on and so forth, and that impacts banks in Europe, that impacts our banks. That impacts our recovery.

SCHEHERAZADE REHMAN: I think there are two issues here. And I will jump on Simon’s one issue, and that’s the banks.

The European banks are much more vulnerable than American banks, because they’re not only exposed in their own home markets, as we were, in terms of exotic instruments, but they’re also overexposed in Eastern Europe. In some cases, they own 80 percent of East European banks, which are faltering. And that’s the other shoe that is coming down the road.

JEFFREY BROWN: That — you’re saying that is still to unwind?

SCHEHERAZADE REHMAN: You’re absolutely right.

On the issue of the exchange rate, I think it’s long overdue. The euro correction is long overdue. The euro was overvalued. There was nothing substantial happening in Europe to warrant this kind of an exchange rate against the dollar, except for weaknesses in the system.

And I think that the market is catching on that the European recovery will be longer and more stalled out than ours, perhaps.

JEFFREY BROWN: All right. We have to leave it there.

Scheherazade Rehman and Simon Johnson, thanks very much.

SCHEHERAZADE REHMAN: Thank you. Thank you.