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"The smartest economist you’ve never heard of"
http://www.washingtonpost.com/busine...l?tid=pm_pop_b
excerpt...
"Blanchard was now keenly aware of the tension faced by all policymakers between what is ideal and what is possible. “I was sure the debt was not sustainable, but we felt we had no other choice but to take the political constraint as given and go along with a package we were rather skeptical about,” Blanchard said.
"While the bailout allowed Greece to avoid a default, the Greek people would wind up paying a steep price. Income and economic output would shrink more than 20 percent, while unemployment would rise to 27 percent as even more debt was piled on debt. For European voters and their politicians, this seemed like a fitting outcome for a profligate country with an uncompetitive economy and a government so corrupt and incompetent that it could not even collect the taxes it was owed. What was never mentioned, at least in public, was that in bailing out the Greeks, European governments were really bailing out their own banks.
"Within a year, Trichet was gone from the ECB, the threat of financial contagion had receded and the IMF had resumed its behind-the-scenes campaign to push for a restructuring of Greek debt. With a new plan in hand, Strauss-Kahn headed to Europe to try to persuade political leaders to take a new approach to Greece. He never made it. En route, he was arrested in New York for allegedly sexually assaulting a hotel maid, a charge he denied and for which he would never be convicted — but that led to his resignation from the IMF.
"Strauss-Kahn’s replacement was Lagarde, who in her previous role as French finance minister had vigorously opposed any consideration of debt restructuring. As a non-economist, she came to rely heavily on Blanchard’s advice and soon became a convert to the cause of Greek debt relief. The following year, a restructuring was announced that cut the value of outstanding Greek bonds by more than half.
"Unfortunately, it proved to be too little, too late. The Greek economy was on its back, and Greek politicians and voters were in no mood to push ahead with the structural reforms they had promised. Although the previous government had pushed through many of the required spending cuts, the deficit remained stubbornly high because the deep recession had reduced tax revenue and increased the number of Greeks qualifying for assistance. Greece was again on the verge of default as a new left-wing government demanded not only relief from fiscal austerity but further debt relief as well. And once again, Europe offered another loan package requiring continued austerity without any debt restructuring.
"Only this time, the IMF refused to go along. In June, Blanchard used a blog post to declare that no rescue would succeed unless Greece was granted additional debt relief in the form of lower interest rates and a lengthy moratorium on repayments. The following month, an IMF review of the Greek program criticized the government for failing to make good on its promises of structural reform but acknowledged that the imposed austerity had been overly harsh, that the forecasts had been overly optimistic and that Greek debt was now unsustainably high. In August, Lagarde confirmed that the IMF would not participate in the new round of funding unless it was accompanied by substantial debt relief. New talks have begun, and the betting now is that some sort of restructuring is inevitable.
"As crucial as debt relief may be, however, it will not be a silver bullet. Defending the IMF’s handling of Greece, Blanchard warned in the blog post that even if all of its debts were wiped out — an unlikely scenario — the Greek government would continue to run significant deficits requiring fresh loans that nobody is willing to provide without a credible and enforceable plan to restructure its economy and bring the budget into balance."
http://www.washingtonpost.com/busine...l?tid=pm_pop_b
excerpt...
"Blanchard was now keenly aware of the tension faced by all policymakers between what is ideal and what is possible. “I was sure the debt was not sustainable, but we felt we had no other choice but to take the political constraint as given and go along with a package we were rather skeptical about,” Blanchard said.
"While the bailout allowed Greece to avoid a default, the Greek people would wind up paying a steep price. Income and economic output would shrink more than 20 percent, while unemployment would rise to 27 percent as even more debt was piled on debt. For European voters and their politicians, this seemed like a fitting outcome for a profligate country with an uncompetitive economy and a government so corrupt and incompetent that it could not even collect the taxes it was owed. What was never mentioned, at least in public, was that in bailing out the Greeks, European governments were really bailing out their own banks.
"Within a year, Trichet was gone from the ECB, the threat of financial contagion had receded and the IMF had resumed its behind-the-scenes campaign to push for a restructuring of Greek debt. With a new plan in hand, Strauss-Kahn headed to Europe to try to persuade political leaders to take a new approach to Greece. He never made it. En route, he was arrested in New York for allegedly sexually assaulting a hotel maid, a charge he denied and for which he would never be convicted — but that led to his resignation from the IMF.
"Strauss-Kahn’s replacement was Lagarde, who in her previous role as French finance minister had vigorously opposed any consideration of debt restructuring. As a non-economist, she came to rely heavily on Blanchard’s advice and soon became a convert to the cause of Greek debt relief. The following year, a restructuring was announced that cut the value of outstanding Greek bonds by more than half.
"Unfortunately, it proved to be too little, too late. The Greek economy was on its back, and Greek politicians and voters were in no mood to push ahead with the structural reforms they had promised. Although the previous government had pushed through many of the required spending cuts, the deficit remained stubbornly high because the deep recession had reduced tax revenue and increased the number of Greeks qualifying for assistance. Greece was again on the verge of default as a new left-wing government demanded not only relief from fiscal austerity but further debt relief as well. And once again, Europe offered another loan package requiring continued austerity without any debt restructuring.
"Only this time, the IMF refused to go along. In June, Blanchard used a blog post to declare that no rescue would succeed unless Greece was granted additional debt relief in the form of lower interest rates and a lengthy moratorium on repayments. The following month, an IMF review of the Greek program criticized the government for failing to make good on its promises of structural reform but acknowledged that the imposed austerity had been overly harsh, that the forecasts had been overly optimistic and that Greek debt was now unsustainably high. In August, Lagarde confirmed that the IMF would not participate in the new round of funding unless it was accompanied by substantial debt relief. New talks have begun, and the betting now is that some sort of restructuring is inevitable.
"As crucial as debt relief may be, however, it will not be a silver bullet. Defending the IMF’s handling of Greece, Blanchard warned in the blog post that even if all of its debts were wiped out — an unlikely scenario — the Greek government would continue to run significant deficits requiring fresh loans that nobody is willing to provide without a credible and enforceable plan to restructure its economy and bring the budget into balance."