Michael Phelps and me

I am a masters swimmer who particularly enjoys the 200 and 400 medley events.  As the new season begins, each member on our team sets his goals for 2011-2012.  Suppose for a second that our captain should tell me that my goals are too modest, that instead they should be to beat Michael Phelps and train in consequence, that anything less would be viewed as failure and evidence that I was a slacker.  I love swimming, I love training, but I think beating Michael is not in my cards.

Today, the Greek public debt represents anywhere between 160% and 170% of GDP, and with GDP shrinking hard, that percentage is more likely to rise than to drop.  The Greeks know it, the EU knows it and creditors know it too.  In fact, Greece is as likely to pay its debt as I am to beat Michael.

Yet the fiction of quasi full debt service (quasi because of the 21% haircut proposed on 2011-2014 maturities) is maintained.  This is proving little incentive for the Greeks (why should we sacrifice for an unattainable goal?), the creditor banks (why should we recapitalize now if we might drag this for another year) and the rest of the EU (Germany will eventually have to step up to the plate).  Worse, the whole affair is shaping up as a dangerous game of musical chairs, where the actors keep a wary eye on each other, ready to jump at a second’s notice, and where markets are gradually seizing up.

A better strategy would be to accept reality and provide the basis for a successful workout.  Greece can only pay a fraction of its debts but that should not result in a regional or global market and economic catastrophe.  Indeed, I believe that such a strategy would result in a sharp recovery in confidence and thus stock and bond valuations. 

Such a strategy would rest on two pillars: the first would be to reinforce those European banks that need it, most likely via capital subscriptions from the European Financial Stabilization Fund.  Bank valuations are so depressed now that relying on private capital is not feasible, except perhaps for a fraction of the amounts needed.  In this regard, it is crucial that the terms of the EFSF capital injection not be punitive, and this for two reasons: banks can be castigated for making bad loans but not so much for buying their country’s sovereign debts, and it is important for the future that private investors want to buy bank stocks.  TARP is a good example to follow.

The second pillar of the strategy would be to provide an incentive for Greece to make tough decisions.  This means that creditors should share in the pain and that Greece should share in the rewards of making sacrifices and revamping its economy.  The idea is not new and there are many ways to do so.  Obviously, refusal by Greece to try hard should be sanctioned severely by the rest of the EU.

It is the ancient Greek mathematician, Archimedes, who said “give me a fixed point and I will raise the world with a lever”.  What modern Greeks need is a lever to raise their energies, i.e. a reasonable baseline with a clear upside and downside.  And what I need is for Michael to give me a one minute head start, on the 200 that is.