On July 15, Greece’s parliament approved austerity measures as a condition for negotiating a new bailout amidst murmurs of blackmail. When the Greek stock market reopened on August 3 for the first time since the end of June, it promptly plunged 15 percent. Soon after the first disbursement from Greece’s newest bailout was received, Prime Minister Alexis Tsipras resigned on August 20 and called for new elections, kindling hope that a new, more cohesive government would implement the bailout conditions.
Don’t hold your breath. This is not the first, and probably will not be the last, troubled sovereign bailout, massive official intervention notwithstanding. Indeed, there are striking parallels between Greece and the failed 1998 IMF-led international rescue of Russia, with stark implications for Greece.
The official financing package for Russia was approved on July 20, 1998, keeping the exchange rate intact and without bailing in Russia’s private creditors. They reacted by seeking to exit as soon as the official, senior loans came in. Rather than seek a bigger bailout, Russia defaulted on August 17. The ruble collapsed, leading to a massive real depreciation; the government was immediately shut out of the capital markets, domestic and foreign, with official loans suspended.
The first parallel, then, is that neither for Greece nor Russia was an upfront haircut imposed on private creditors in spite of clear market signals on insolvency and genuine concern about economic fundamentals. But after its 1998 default, Russia received crucial IMF support for renegotiating its London Club (private) debt, resulting in a 50 percent reduction in present-value terms. Similarly, in Greece’s case, a haircut was eventually imposed on its private creditors in 2012, two years after the bailout began. By then, the bailout’s credibility was in tatters. In both cases, the bailouts ran into trouble because junior private creditors were not bailed in at the outset, which is when the official sector’s bargaining power is the greatest.
The second parallel is that like Greece’s economy today, Russia’s economy in 1998 was dysfunctional. It was overrun by barter and noncash settlements, which a World Bank study found incorporated implicit subsidies of the order of 10 percent of GDP. The government was unable to collect taxes, its debt was on an explosive trajectory, the real exchange rate was hopelessly overvalued, and managers of privatized firms were stripping assets instead of maximizing firm value. Yet the official bailout gambled on the hope that the accompanying fiscal and structural reforms would spur growth and restore market confidence. It was halted only by Russia’s default.
The third is a parallel in reverse: after its August 1998 default, Russia’s young, reformist prime minister, Sergei Kiriyenko, was dismissed and old-timers Chernomyrdin and then Primakov were brought back, deepening the gloom. The hope in Greece is that new elections will bring in a government of converts, with Tsipras backing off from his populist anti-austerity platform. But note Barry Eichengreen’s arguments that Tsipras’s moves over the past few months smack of an “effort to evade responsibility … the action of leaders more interested in retaining office than in minimizing the cost to the country of the crisis.” Here’s the surprise: Russia’s economy grew by over 5 percent in 1999 versus initial projections of a contraction of 7-10 percent, in spite of Kiriyenko’s dismissal.
This brings us to the pivotal differences between Greece and Russia. While Russia received IMF backing for its debt deal with the London Club, it did not receive a single penny in crisis-related financing after it defaulted on August 17, 1998; its last loan from the IMF was less than half a billion dollars received under a standby arrangement in 1999. The large real depreciation obviously helped with the unexpectedly large rebound after the 1998 crisis. But the key factor changing economic behavior and galvanizing the Russian government into action was the “sudden stop” it faced in its financing after it defaulted. It moved quickly to get rid of barter and noncash settlements, increase cash tax collections, and eliminate implicit subsidies. The gas and electricity companies started insisting on punctual cash payments for their bills, enforced by the threat of disconnecting delinquents. Such moves had been deemed politically unimaginable before the 1998 crisis.
Greece cannot bank on a massive real depreciation because of its fixed exchange rate with Germany. It received a significant write-down on its private debt in 2012. But this has patently not been enough and the IMF, which has refused to participate financially in the newest bailout, is rightly seeking another debt write-down. Greece deserves debt relief from the eurozone, not least because its initial debt restructuring was delayed, benefiting the rest of the eurozone. As Olivier Blanchard put it, “Debt restructuring was delayed by two years [owing to] concerns about contagion risk … and the lack of firewalls to deal with contagion.” But, in keeping with Russia’s experience in 1998, Greece should not receive a penny in new official funds for crisis-support, not even European Central Bank support for its banks, unless this is on pure liquidity grounds; averting a humanitarian crisis is another matter.
In the aftermath of Russia in 1998, it became fashionable to ask: “Who lost Russia?” But, as I recall Larry Summers retorting, “Russia was only the Russians’ to lose.” In like vein, Greece is only the Greeks’ to lose. Only their elected government can decide whether pensions must be cut or protected, fired public servants reinstated, privatizations done or overturned, rich people with swimming pools and palatial homes who declare paltry incomes be penalized, bank depositors be bailed in, tax rates raised, or the euro exited. And they will do so with a much clearer head when the government faces a binding cash constraint. While Russia was rated investment grade five years after its 1998 default, Greece is still floundering five years after its bailout began. The troika and Greece both need to bite the bullet and end the credibility-draining circus that has come to characterize the Greek bailout.
The author is a former senior adviser at the World Bank and former chief economist for emerging markets at GLG in London. His second book, “
How Does My Country Grow? Economic Advice Through Story-Telling
,” was published by Oxford University Press in 2014.