Don’t Worry About Greece

The latest round of fretting in global debt markets is focused on Greece (WSJ; Greece).  This is misplaced.

To be sure, there will be a great deal of shouting before the matter is formally resolved, but the Abu Dhabi-Dubai affair shows you just where Greece is heading.

The global funding environment (thanks to Mr. Bernanke, Time’s Person of the Year) will remain easy for the foreseeable future.  This makes it very easy and appealing for a deep pocketed friend and ally (Abu Dhabi; the eurozone) to provide a financial lifeline as appropriate (a loan; continued access to the “repo window” at the European Central Bank, ECB).

Of course, there will be some conditions – and in this regard the Europeans have a big advantage: the Germans.

Everyone knows the German authorities are tough and hate bailouts (aside: except for their own undercapitalized banks).  And the Germans can punish the Greeks with hostile bluster that the bond markets will take seriously – further pushing up Greek bond yields and credit default swap (CDS) spreads.

But, in reality, there are many voices at the ECB table and most of them are inclined to give Greece a deal – put in place a plausible “medium-term framework” and we’ll let your banks roll over their borrowing at the ECB, even if Greek government debt (i.e., their collateral) is downgraded below the supposedly minimum level.

So Greece has a carrot and a stick – and refinancing its debt is so cheap in today’s Bernanke-world, they will not miss the opportunity.

Greece has become a quasi-sovereign, in the sense that it issues debt not in its own currency.  But it still has control over its own cash flow.  And most budget math is based on perceptions of plausible baselines that are – in case you didn’t already know – more about political perceptions (in this case, within the ECB governing council and perhaps EcoFin) than likely economic futures.

The important development is the role of the European Central Bank.  It is becoming a de facto International Monetary Fund (IMF), but just for the eurozone (or is that the European Union?).  It will lend a troubled country money, but only if the government does some of the hard fiscal work.  The IMF may have a role to play in budget advice and assessment for Greece, but it may also be squeezed out of a meaningful policy role.

This is good, in the sense that there is no stigma attached to having your banks borrow from the ECB.  When random bad shocks hit, it’s good to have a safety net that countries are willing to use.

But this is also less good, in the sense that as the global economy moves back towards boom times, putting more bailout mechanisms in place and removing even further the downside risks for creditors is – in the broadest possible terms – asking for trouble.  Why worry about whether borrowers can repay if there is a deep-pocketed sovereign (run by a cousin, neighbor, or committed friend) who will, when push comes to shove, protect all creditors?

About Simon Johnson 101 Articles

Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at MIT's Sloan School of Management. He is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., a co-founder of, a widely cited website on the global economy, and is a member of the Congressional Budget Office's Panel of Economic Advisers.

Mr. Johnson appears regularly on NPR's Planet Money podcast in the Economist House Calls feature, is a weekly contributor to's Economix, and has a video blog feature on The New Republic's website. He is co-director of the NBER project on Africa and President of the Association for Comparative Economic Studies (term of office 2008-2009).

From March 2007 through the end of August 2008, Professor Johnson was the International Monetary Fund's Economic Counsellor (chief economist) and Director of its Research Department. At the IMF, Professor Johnson led the global economic outlook team, helped formulate innovative responses to worldwide financial turmoil, and was among the earliest to propose new forms of engagement for sovereign wealth funds. He was also the first IMF chief economist to have a blog.

His PhD is in economics from MIT, while his MA is from the University of Manchester and his BA is from the University of Oxford.

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2 Comments on Don’t Worry About Greece

  1. Obviously Mr Johnson doesn t understand the situation. Greece has been warned for years to get its house in order. The ECC is not there to bail out Greece because it has been living beyond its means. Greece makes out 2 % of the European economy and if Greece doesn t face the hard lessons itself there is nothing Europe can do but to let it go down the drain. When it does go down the drain the Euro will be hit. But thats good for exports. Greece will become a poor country again. Its been so missmannaged and there is so much corruption there no one wants to touch this place.

  2. Mr. Insinger is a ghostly figure, popping in and out of obscurity, cutting a path in his life that only he knows to where. One is known by those who know him, and comments like this can only pale next to direct knowledge. Hide no more, Mr. I!

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