D. Kefalazos: Monnet Matters: Do we believe in the Eurozone or not?

The idea of using the European Financial Stability Facility (EFSF) to buy up a good part of the Greek debt in the secondary market at discounted prices of up to 50% is now also gaining ground. There are, however, two drawbacks to this proposal. For one thing, the EFSF cannot intervene directly in the secondary debt market and has to lend money to Athens to do so. Then Greece, in the years to come, can start asking for more easing of its obligations to the EFSF and the whole thing may end up as political horse-trading. A second impediment to the debt buy-up in the secondary market is related to the fact that all holders of Greek debt paper, once they see a lot of buying interest for their bonds, can raise their selling prices and in the end may ask for a full nominal value payment.

In this way there will not be substantial gains made in debt reduction. Of course, buyers may come into negotiations with the debt holders and strike package-sale deals. But in this case, the rating agencies may then call a selective default, which would render the whole situation as a value judgment, because such deals in the secondary debt market may seem detrimental to sellers, due to a substitution of free market-forces play by bilateral agreements, under the threat of a uncontrolled “haircut” in their Greek bond holdings.

On the other hand, the current market situation is providing strong arguments that such deals may leave nobody unduly worse off. Coming to the ethical side of a Eurozone bail-out in favor of Greece, it is again a value judgment and of course a political decision to conclude that the culpable parties in this over-indebtedness tragedy have suffered enough punishment for their wrong-doings over the past ten years. Such a procedure appears tantamount to Eurozone bonds, either directly issued or indirectly financed through the EFSF.

All this must be done in a co-ordinated and standard manner, so as to set a functioning precedent. Actually, there is such an instrument, in what the Commission has proposed and the Parliament and Council have accepted while creating the Six Directives and the European Semester Platform. The problem is, however, that this platform should be binding and provide for strong punishments for all parties, such as exclusion from Eurobond issues for those with excessive budget deficits, including France and Germany.

In short there are political instruments to straighten things up in the Eurozone, but they require a strong belief in a common future.