While on vacations in Greece, I had a chance today (Sunday 28 June) to have a long discussion with Michael Sarris who was Cypriot Minister of Finance between 2005 and 2008 when the Euro was introduced in Cyprus and then again Minister of Finance during the March 2013 crisis when Cyprus faced negotiations with “the institutions” very similar to those faced today by Greece. Very few people in the world have as informed and first-hand knowledge of the situation as Michael Sarris does. Here are my questions and his answers.
Michael, you were Minister of Finance when Cyprus, like Greece today, had to negotiate the terms on which the EU would continue supporting Cypriot banks, so I am sure you have important insights both on how such negotiations proceed and what Greece should do. But before we move to that, let us deal with the present situation. The referendum is on. If you were Greek, how would you vote next Sunday (and why)?
We start with the assumption that Greece wants the best possible deal. In that context, I will not have resorted to the referendum because the “no” vote will not strengthen Greece’s bargaining positon while polarizing the population. The “democratic mandate” card had already been played with limited success. If you push me to give a specific answer, I would vote “yes” because it takes us back to the negotiating table with the chance of a better outcome.
The situation looks to have reached an impasse. You were able to reach a compromise with other EU countries. I know that the two situations are different, but do you think that the Greek side might have overplayed its hand? Could things have been handled differently?
Yes, I believe there was a real chance early to reach a workable solution. I think the Greek side overplayed the democratic mandate card, showed disrespect to the technocrats working on the issue, and claimed the mandate to solve a more general euro problem. And in those respects it was a counterproductive approach.
You would agree that the recovery in Greece is impossible without a significant debt rescheduling which would reduce the total value of the Greek debt. But Europeans were very inflexible on that point. Are they wrong on this, and what could have the Greek government done differently, if anything, if there is unwillingness to reschedule a part of the debt? Does this not end negotiations right there?
Debt rescheduling is in my view an important part of a comprehensive approach which would have had a chance to work. But debt rescheduling cannot be a substitute for reforms that will support growth. In my view, if the Greeks came forward with bold reform proposals they would have forced the institutions, particularly because the IMF was already pushing for some debt relief, to include more concrete promises for lightening the debt burden as progress was made in the reform agenda.
You would have linked lightening of the debt to the reform?
Yes. And to complete the answer, not only because it would have given EU a chance to do something novel in dealing with the advanced economies but also because reduction of the debt combined with an improvement in economic activity would allow debt/GDP ratio to go down, and dent burden to become more sustainable.
In the Cypriot settlement Cypriot depositors (and banks) lost almost a quarter of the GDP. So loss had to be absorbed by somebody in order for the system to continue functioning. Some people argue that in the Greek case the loss should have been absorbed early on by German and French banks that lent irresponsibly, and that the whole operation of bailing out of Greece was really a massive bail out of German and French banks. Now the risk is carried by EU taxpayers (through ECB holding of the debt). Does this seem to you a realistic description of what happened?
It is an accurate description of what happened in the sense that the cost of past excesses by both lenders and borrowers was passed onto the Greek tax-payers who have to repay the new money Greece got. A combination, in my view, of misplaced fear of moral hazard and the desire to protect the large French and German banks led to what can now be called “the original sin” of crisis mismanagement with whose consequences we are still living. Once the Europeans decided not to observe the no bail-out clause in order to protect own financial stability, they should have gone all the way and forgiven a part of Greek debt against credible reform program.
Let’s end with a more optimistic note. How is Cyprus doing now? Is the worst over, and what would be, in your opinion, lessons for Greece?
Cyprus is doing much better than was expected at the time of the depositors’ bail-in. We have removed capital controls and stopped the output decline but unemployment remains high and banks non-performing loans are still a challenge. But the direction is positive.
For Greece the lesson is that you implement as faithfully as you can your agreements, move on, and go easy on the blame game.
Finally, for Greece would you have accepted the creditors’ program even if there is no debt reduction at all?
This is not an easy question to answer because I believe that a good program with positive growth prospects would have eventually forced some sort of debt relief. So I would not have caused a rift at the beginning and would have taken my chances of debt relief as program implementation proceeded.
This interview was first published on Branko Milanovic Blog
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