STOCK MARKET WATCH - Wednesday, 11 January 2012

[Demeter]

21. The Denials That Trapped Greece

http://www.nytimes.com/2011/11/06/business/global/europes-two-years-of-denials-trapped-greece.html?_r=1&ref=business

The warning was clear: Greece was spiraling out of control. But the alarm, sounded in mid-2009, in a draft report from the International Monetary Fund, never reached the outside world. Greek officials saw the draft and complained to the I.M.F. So the final report, while critical, played down the risks that Athens might one day default, an event that could have disastrous consequences for all of Europe...What is so remarkable about this episode is that it was not so remarkable at all. The reversal at the I.M.F. was just one small piece of a broad pattern of denial that helped push Greece to the brink and now threatens to pull the euro apart. Politicians, policy makers, bankers — all underestimated dangers that seem clear enough in hindsight. Time and again over the past two years, many of those in charge offered solutions that, rather than fix the problems in Greece, simply let them fester.

Indeed, five months after the I.M.F. made that initial prognosis, Prime Minister George A. Papandreou of Greece disclosed that under the previous government, his country had essentially lied about the size of its deficit. The deficit, it turned out, amounted to an unsustainable 12 percent of the country’s annual economic output, not 6 percent, as the government had maintained. Almost all of the endeavors to defuse this crisis have denied the overarching conclusion of that I.M.F. draft: that Greece could no longer pay its bills and needed to cut its debt drastically. Until October, when European leaders conceded that point, the champion of the resistance was Jean-Claude Trichet, who stepped down IN NOVEMBER as president of the European Central Bank. It was he who insisted that no European country could ever be allowed to go bankrupt.

‘‘There is simply no excuse for Trichet and Europe getting this so wrong,’’ said Willem H. Buiter, chief economist at Citigroup. ‘‘It is fine to make default a moral issue, but you also have to accept that outside of Western Europe, defaults have been a dime a dozen, even in the past few decades.’’ If leaders had agreed earlier to ease Greece’s debt burden and moved faster to protect countries like Italy and Spain — as U.S. officials had been urging since early 2010 — the worst might be behind Europe today, experts say. Today, Greece’s problems have worsened so much that they threaten to rip apart the euro and the decade-old 17- country monetary union created within the European Union to manage the prized common currency. An endless series of crisis meetings has pushed Athens into imposing an increasingly strict program of austerity on the Greek public in return for the promise of two major bailouts from more credit-worthy European countries, along with the crucial support of the I.M.F. and the European Central Bank.

European leaders finally bowed to reality at a late-night meeting last OCTOBER when Angela Merkel, the German chancellor, pushed private creditors to accept a 50 percent loss on their Greek bonds. Mr. Trichet had long opposed such an action, fearing that it could undermine the vulnerable European banking system and lead to a global meltdown like the one that followed the bankruptcy of the U.S. investment bank Lehman Brothers in September 2008. But now, many view the latest rescue plan as too little, too late. ‘‘Because of all this denial and delay, Greece will need to write down as much as 85 percent of its debt — 50 percent is not enough,’’ Mr. Buiter said...It was never going to be easy to turn things around in Greece, particularly given European politics. In countries like Germany and the Netherlands, many people oppose bailing out their southern neighbors. Policy makers and, indeed, many financiers believed that they could buy enough time for Greece to solve its problems on its own. ‘‘It was quite obvious, by the spring of 2010, that Greek debt could not be paid off,’’ said Richard Portes, a European economics professor at London Business School. ‘‘But in good faith, policy makers felt that Greece could grow out of its debt problem. They were wrong.’’

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