Steven Pearlstein, as usual, has a great column, this time on the crises in Greece and the other European countries that required bailouts. He points out, quite clearly, that the correct path is to restructure the Greek debt so that non-Greek European banks that hold that debt take a loss, that the governments of those countries where the banks reside help them recapitalize, and that the terms imposed on Greece be eased so that the Greek economy at least has a chance of recovering and gaining fiscal and economic stability.
One problem is that the European community does not want to go along, and with the current head of the IMF out of his luxury hotel and into Riker’s Island, leadership has fallen to Ms. Merkel of Germany, who went on record yesterday as opposing any change in the terms of the Greek rescue package.
Greece could force the issue, by recognizing that as a debtor they have considerable power, in fact that higher the debts the greater the power. One strategy for Greece might be the following.
- Greece would declare it was going to leave the Euro.
- A new Greek currency would be created with an initial exchange rate based on purchasing power parity. The new currency would float, and one assumes be quickly devalued.
- Greece would unilaterally declare that any Euro denominated debt or contractual obligations of the Greek government, Greek financial institutions or Greek citizen could be payable in the new Greek currency at the exchange rate at the time of the payment.
- Greece would create a new central bank, exchange the new Greek currency for all holdings of Euro’s held by Greek citizens and businesses and institutions. This would give the Greek central bank the ability to weaken its currency and make Greece competitive again in world markets.
Yes, substantial inflation would result, and European fury would be almost unlimited, but Greece would in effect have restructured its own debts. Furthermore, it may be that just threat of such action would cause the Europeans to re-negotiate with Greece and change the terms of the bailout to ones that might just give Greece a chance to recover. Europe would be furious, but the days where Germany militarily invades another European country have long passed.
It used to be said “Beware of Greeks bearing gifts”, it could soon be said “Beware of letting Greece know the power of the debtor”.