The New York Times recently quoted a Greek florist: “I am disgusted because we Greeks brought this mess upon ourselves.” And a car rental worker: “We did this to ourselves.”
The ‘Greek’ drama of wonton lifestyles, spendthribt government expenditure, a sprawling Greek welfare state, easy living, had led to a country gone bust. The Greek government was bankrupt, about to default on Euro 8.5 billion payment due on May 19.
What is there to worry when conventional wisdom has held that countries cannot go bankrupt, that only individuals and institutions could default on loans? “The assumption that the solvency of governments may be taken for granted is enshrined in the international Basle Accord” (Shutt, 1999). By the same token, lending to governments has been considered safe: governments simply cannot/will not close shop and disappear to some distant land.
|IMF building in Washington
Jean-Claude Trichet, President of the European Central Bank, warned that European governments must continue to cut government spending. But abter 10 years of deficits can more finger-wagging by Mr. Trichet and a new bailout fund backed by the IMF be enough to return European nations to fiscal health?
Of course Greece will not ‘flee’ their debtors. But there was a catch. The default posed a special problem because Greece had been downgraded to junk status and was staring at Europe’s first sovereign debt default. That created the panic among EU members and around the world because non-payment would have engulfed not only Greece, but the rest of the Euro monetary system.
To add to the urgency there were other countries in Europe teetering on near bankruptcy. Credit ratings of the foursome had dropped to below sustainable levels: Italy is indebted with a $1.4 trillion, Ireland with $867 billion, Spain with a $1.1 trillion and Portugal with $286 billion.
There was worry the world over that the Greek mess could engulf the world. The Singaporean Prime Minister was apprehensive that the events in Greece, thousands of miles away, had the potential of hurting Singapore. Australian Premier, Kevin Rudd, was scathing about the EU package for Greece when he lashed out that: "Markets have judged those [bailout] arrangements to be inadequate." Japan's deputy finance minister, Rintaro Tamaki, told Bloomberg news agency "All the financial markets are now in turmoil …
The impact of the Greek crisis has gone beyond the euro area and is now a global issue.”
But not to worry: Greeks, with their ‘tiny’ debt in comparison to the debts of Italy, Ireland and Spain, have a support community to go a begging to, the European Union. Abter some dithering (led by Germany), along with the European Central Bank and the ever present IMF, the EU had no choice but to bankroll Greece with a 110 billion-euro ($146 billion) loan last Sunday night.
That was to give Greece’s socialist led government breathing space to get its house in order- slash what has been called her “infamous government profligacy,” rein in the soaring deficit of 14% to under 3% GDP, raise taxes, cut the lavish, bighearted government wages, pensions, and benefits of the bloated government employment structure (which had contributed to the crisis), match expenditure with revenue. With axing of the Greek welfare state on the cards, Greeks, accustomed to “an easy life style,” used to extensive bribery and tax default as way of life, reacted in ‘shock and awe’ in typical Greek fashion of violent demonstrations.
The US, which obten wags its fingers at other puny countries, has a ratio of government debt to GDP- the key yardstick of a government financial standing, which will reach 100% in end 2010. Benjamin Friedman stated in his “Day of Reckoning” way back in 1989: “America [is] selling our children’s birthright…our government has borrowed record sums on our behalf, we owe foreigners more than they owe us.”
OECD statistics show that by 2011, US Government debt as a percentage of GDP of OECD nations will rise from 70% in 2000 to 100% end 2010. Japan will become the leader of the pack when it reaches an astounding 200%! Ireland’s debt is due to reach 93%, Britain will reach 94%.
While Europeans dither and fry in their own fat, how is Sri Lanka in terms of a possible default of repayment of loans?
The perpetually optimistic erstwhile Governor of the Central Bank, Nivard Cabraal, pointing to Sri Lanka’s massive foreign exchange reserves, sees a sunny side up scenario for the country. Sri Lanka is sitting on a pile of foreign exchange reserves. Not to worry.
But in Washington, to where he had gone to talk to the IMF, when asked about the longterm changes and challenges to Asia as a result of the global economic crisis, he was candid in stating that there was work to be done in the region, Sri Lanka included:“The banking sector stability as well as the financial system stability, has to be strengthened further, which means that regulation has to be strengthened. These are good lessons for us. One of the problems is that when problems ease, everything is forgotten, and people think that there has been a strong recovery-faster-than-normal recovery- and they are back to business. That can lead to a false sense of complacency. We need to guard against that.”(F&D, IMF, Dec, 2009, p.47).
Good advice, except that the good Governor is the one who needs to follow his own counsel and guard against complacency.
A few years ago, the Central Bank, facing a disastrous foreign exchange reserve situation, had to plead with Sri Lankans abroad to bank their foreign exchange in NRFC accounts; so grave was the situation, it went to the extent of paying bonuses of 20% on interest earned (in SLR) as encouragement.
Then there was the time when Sri Lanka could not get loans from ‘traditional lenders’ (read IMF). The country went to commercial bankers and borrowed $500 million and another $300 million at punitive commercial rates. These loans are falling due for repayment shortly.
Sri Lanka needed more. Despite thumbing up at the IMF, we went back to it, possibly because the country cannot find more commercial bankers who will lend, even at exorbitant rates. Playing tough the governor states that we will not bow to IMF pressures even though he seems to be anxiously (and optimistically) awaiting the disbursement of the third tranche of the $2.6 billion loan. However, Koshy Mathai, the IMF Representative, is also waiting. “What we are looking for is the budget and meaningful steps towards reducing the deficit and to also doing it in an economically sensible way.”
With no budget yet in sight as well as for the past year, the IMF may be in for a long wait.
Veteran US columnist Robert Samuelson hit the nail on the head when he stated, “Countries cannot overspend and over borrow forever. By delaying hard decisions about spending and taxes, governments manoeuver themselves into a cul-de-sac.” The general view of economists was that lending more money to already over borrowed governments is no solution. In addition bailing out an indebted country encourages it and others to be reckless, to avoid taking painful steps to cut deficits, in the belief that there will be someone continuing to lend.
What is the scenario facing Sri Lanka when it comes to repayment of its loans?
If continuing expenditure/income shortfalls and the resultant deficits lead to foreign borrowing to meet the difference, will lenders lend?
This is a reasonable question given that state expenditures and revenues don’t match up; hence the deficits which the IMF wants the country to reduce, in order to release the third component of their loan. While Sri Lanka is not Greece, it is good to note that Greece could not find any lenders at 13% interest.
How can two digit deficits be reduced when expenditures overshoot revenues continually? To add to this, there are worrying ‘leaks’ in the system, which signify government profligacy.
Many state enterprises are running up loses- hemorrhaging money the country can ill afford. For example, Petroleum - Rs.12.3 billion; SriLankan Airlines-Rs.12.2 billion; Railways - Rs. 4.7 billion; CEB - Rs.7.4 billion, SLTB - Rs.5.1 billion; Mihin Lanka - Rs. 0.93 billion; altogether a staggering sum of Rs. 42.6 billion in losses. With the arbitration award due on the hedging deal there may be other dues to pay.
With other loan repayments looming, the IMF hedging on the third tranche of its loan as well, what is plan B? Is there one?