“All roads lead to Rome” may have been true in ancient times, but policymakers during this Spring Meetings season in Washington have been focused on another classical crossroads: All roads now lead to Athens, as the intensifying eurozone crisis is again stoking fears that Greece may soon “crash out” of the European common currency system – potentially dealing a severe shock to the still-fragile global financial markets.
“The discussions about Greece have pervaded every meeting” during this fast-forward week of finance and diplomacy, said the United Kingdom’s Chancellor of the Exchequer, George Osborne. That viewpoint was reinforced by a studious chronicler of the Greek drama’s daily details, Chris Giles of The Financial Times, who asserted – in an unusually dismissive swipe – that “the antics of Greece dominated the Spring Meetings of the International Monetary Fund and World Bank.”
The Greece-focused anxiety was palpable to many Spring Meetings attendees, judging by the number of corridor conversations and solemn sidebars that dwelled on the eurozone drama – especially on the Fund’s side of 19th Street NW. While most forums and panels on the Bank’s side of the street focused on the progress of many developing countries, events at the Fund seemed consumed by the policy contortions within Greece's faltering economy, as Meetings-goers monitored every tremble of their text messages to follow the week’s the week’s staccato bulletin-bulletin-bulletin news of Greece’s financial flailing.
“The mood is notably more gloomy than at the last international gathering,” said Osborne, “and it’s clear . . . that a misstep or miscalculation on either side [of the Greece negotiations] could easily return European economies to the kind of perilous situation we saw three to four years ago.” Having received a $118 billion bailout in May 2010 and a second package of $139 billion in October 2011, Greece is now at an impasse with its creditors: the IMF, the European Central Bank and the European Commission. A new government in Greece – having denounced the loan conditions reluctantly accepted by its predecessor governments – is debating how, or whether, it should comply with lenders’ pressure for far-reaching reform. Greece's foot-dragging has exasperated the lenders even as Greece envisions a potential third bailout program.
As the Greek tragedy unfolds, the doleful observation of Wolfgang Münchau in the FT seems all too apt: “Until last week, discussions with Greece did not go well. That changed when the circus of international financial diplomacy moved to Washington for the Spring Meetings. Then it became worse.”
The latest indignity was this week’s credit downgrade, to below-junk status of CCC+, by rating agency Standard & Poor’s, rattling the financial markets late in the week and sending Athens’ borrowing cost for two-year notes to more than 26 percent.
The IMF’s Christine Lagarde seemed to use every opportunity, throughout the week, to underscore the economic danger of Greece’s continued delay in enacting far-reaching reforms to try to rescue its chronically troubled economy. Lagarde seemed steely as she shot down – first in private and then, pointedly, in a formal IMF news conference – Greece’s tentative suggestion that it might be granted more time to repay its debts to the IMF: “Payment delays have not been granted by the board of the IMF in the last 30 years.” Allowing Greece more time to honor its commitments, she said, is “clearly not a course of action that could be recommended.”
Lagarde also used her very final reply in the week’s very final session, on Sunday afternoon, to emphasize yet again “today’s problem: to continue the hard work that needs to take place between Greece and the authorities.” Just in case that message to Athens was not clear enough, Lagarde on Sunday told FT interviewers: “What needs to happen now is that [policymakers in Greece] need to actually deliver the measures, the tools, the reforms that could actually reach the objectives that have been set between the international community and Greece: restore stability, improve the economy, [and] make sure that, one of these days, Greece re-accesses the financial markets on its own and without support.”
That ill-defined timeline – “one of these days” – suggests how long a road ahead Athens may still have to travel, even after having made some painful economic changes, before it can again be judged in the markets to be creditworthy.
Europe’s ever-slipping deadlines for decisive action by the Greek government now have been re-set yet again, until May 11 – as all observers seem to agree with German Finance Minister Wolfgang Schäuble that a once-possible agreement will be impossible by the hoped-for April 24 meeting in Riga of eurozone financial officials. When European Central Bank leader Mario Draghi told an IMF audience on Saturday that the ECB has “enough instruments at this point in time” to absorb the shock if Greece’s crisis intensified, his remarks suggested that the creditors have calculated that they can withstand the shock of Greece’s possible departure from the eurozone.
The eurozone tension is so fraught that Spring Meetings-goers opened their weekend copies of the FT, widely distributed throughout the IMF conference venues, to find an analysis that was practically an economic obituary, suggesting that Greece’s hopes are evaporating “as every day passes.”
Greece may account for only 1.8 percent of the eurozone’s overall Gross Domestic Product, but the global stakes in maintaining financial stability are so high that President Obama on Friday digressed in a news conference to underscore American concern: “Greece needs to initiate reforms; they need to collect taxes; they need to reduce their bureaucracy. . . . [The new leaders in Athens] need to show your people that there’s hope, that you can grow – but you have to show those who are extending credit, who are supporting your financial system, that you’re trying to help yourself; that requires making the tough decisions.”
“If Greece is really considering defaulting on its IMF obligations, its situation is more dire than most observers appreciate,” writes Mark Gilbert of Bloomberg View, a longtime observer of the eurozone’s woes, noting that “just three countries are currently behind on their IMF payments”: Sudan, Somalia and Zimbabwe. Greece, he asserts, “may not be a ‘failed state’ in the way that Zimbabwe is, but default would underscore the perception that Greece is a ‘failing state’ " – and “would destroy any remaining trust in the Greek government.”
Gilbert offers a cold-eyed (some might say merciless) view of Greece’s financial condition – “the hard-to-admit truth is that Greece seems both unwilling and unable to pay the dues that accompany euro membership” – and concludes that “Greece might be better off on its own. . . . For Greece, the euro party might be over, whether it stumbles out of its own accord or gets tossed out for misbehavior.”
The international pressures on Greece have become so severe that many observers – even those who wish Greece well – seemed perplexed by this week’s remarks by the Greek Finance Minister, Yanis Varoufakis, who on Thursday deployed the full measure of his rock-star magnetism to deliver an articulate yet curiously light-on-practical-details address to the Brookings Institution (just an hour after a parallel address by Schäuble). Like his recent academic-style analysis with the Institute for New Economic Thinking, Varoufakis’ tour d’horizon at Brookings offered a candid history of how Greece and the eurozone got into their current predicament – but he didn’t offer many details about the plans that Athens may have for the question of the hour: how Greece will deal, in practical terms, with its creditors.
Like many observers, the FT’s Münchau was left bewildered by Athens’ “puzzling negotiating strategy” in search of what Varoufakis – an academic specialist in game theory, who may be trying to bluff his counterparts – called “an honorable agreement with our partners.” Münchau no doubt reflects what many crisis-watchers are thinking, as he marvels: “I do not understand why he spends so much time preaching to those who tend to agree with him at prestigious conferences in pleasant surroundings. Should he not be working on the hard negotiations with his European creditors, and on the [potential] Plan B scenarios [if Athens must default on its debts]?”
As Münchau and others have pointed out, a Greek default on its debt does not automatically require an exit from the eurozone – and, even if that did occur, either by accident or by design, Greece would remain a member of the European Union. Eurozone officials may be able to devise a way to avoid a “Grexit” by tolerating some sort of “default within the eurozone.” Yet, dreading a more severe financial accident, Münchau fears that “one or more people on both sides of these discussions may simply be miscalculating. We may be on the verge of one of those sleepwalking moments in European history.”
The longer-range tragedy, for historians to explore and explain, is how the situation in Greece deteriorated to this astonishing point: where the very country that conceived of the idea of democracy, during its Golden Age almost 2,500 years ago, would turn out to be almost ungovernable at this stage in its history – with a succession of regimes, of all parties and across all shades of the political spectrum, that have proven unable to follow-through on promised economic reforms. Despite the lack of policy detail in his Brookings speech, Varoufakis was surely on-target in his lament for an economy replete with "chronic malignancies.”
A wide range of economists sans frontières have charted the many difficult reforms that will be needed if Greece is to successfully reorganize its governance and renew its economy. But policymakers’ concern over this Spring Meetings weekend, and their challenge in the tense weeks to come, is to help Greece – and potentially the global financial markets – maneuver carefully back from the brink of what could be an economic abyss.