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Speech by Charles Dallara, Managing Director of the IIF

14/11/2012 - Views & News


Charles Dallara, Managing Director of the IIF, was invited by George Zanias, Chairman of the Hellenic Bank Association, to speak at an event held recently at the NBG Karatzas Building (14/11/2012). The subject of his talk was “Adjusting Course: a Strategy for Europe and Greece to Emerge from the Crisis”.

George Zanias introduced Charles Dallara with the following remarks:

 “Mr Charles Dallara has consistently supported the case for a voluntary restructuring of the Greek public debt. This effort was officially launched in May 2011, beginning with the voluntary extension on the maturity dates of Greek Government bonds and reaching completion in March 2012 with a full restructuring of the Greek sovereign debt by reducing the nominal value of bonds by 53.5%—the so-called “haircut”—, a substantial cut in the interest rates on the debt, plus the extension of the repayment term on the remaining debt held by private investors. The two latter actions were also applied to the debt held by Eurozone states. It was, I think, the biggest transaction ever carried out internationally. Charles participated in the negotiations, which were held in various locations: Athens, Brussels, Rome, Paris, Washington and elsewhere, and at various levels. From Euroworking Group level to country leaders and government level, on a round-the-clock basis. Charles was always present, endeavoring to secure the best possible results for the credit institutions he represented and to achieve an agreement that would also be accepted by markets. Charles and the Institute of International Finance (IIF) also looked into other aspects of the Greek problem. He drew attention to the excessive application of austerity measures, particularly the economic programs which have implemented, while the IIF consistently highlighted the need to establish the sustainability of the Greek debt, offering ideas and insights. Thus, I’m sure that he will have a lot to say today. His speech here, today, under the title “Adjusting Course: a Strategy for Europe and Greece to Emerge from the Crisis” is delivered at a crucial moment for the country. In Greece, we have been expecting the long awaited disbursement of funds that will eventually lead to gradual relief from uncertainty and a change of course towards an exit from the crisis. Against this backdrop, Europe, and the Eurozone in particular, is engaged in an ongoing effort to overhaul its imperfect architecture and fortify the institutional solidity of the euro. Accordingly, the Eurozone is also endeavoring to recover from its own crisis, which, although less serious, involves serious fiscal imbalances, a competitiveness deficit and banking sector problems. Charles and the IIF have generously provided their own platform to the Greek side from which to promote their positions. It is therefore with pleasure that the Hellenic Bank Association can now return the favor, even if just in small part, by giving him today the opportunity to use our forum to air his views”.

Charles Dallara, Managing Director of the Institute of International Finance:

“I am indeed delighted to be back in Athens today, and pleased to see so many old friends, many fellow warriors in the cause of battling Greece’s economic and debt problems, including of course George and his new colleague, but also old colleague, Petros, with whom I worked so closely during their tenure as key representatives, senior officers, in the Greek government, advancing the work that we were all striving to do in addressing Greece’s debt. Of course, as I sit here today I am very conscious that all of that work touched upon every financial institution in this room, and indeed many of you were key collaborators in this difficult exercise.

As I will outline, for reasons that I think are obvious, what we achieved in our debt negotiations was unprecedented in its scale and in its thrust to cut the scale of the Greek debt. The fact that we have not yet fully seen or realized the benefits of that dramatic move by Greece’s creditors, many of whom are represented here in this very room, is something that we need to contemplate. Today I will focus on a subject, as George said, close to the heart of everyone here, close to the heart of many in the streets of Athens, and indeed in the streets of Europe more generally: How to formulate a strategy that will enable Greece, and Europe, to emerge once and for all from this crisis, which seems at times to all of us a perpetual one.

Outside, today the people of Greece are protesting against the austerity they are living through. It is, in fact, perhaps a touch ironic that I am speaking here today, on a pan-European no austerity day, with demonstrations and work stoppages in many capitals, including of course here in Athens. Although this sentiment, no austerity, is understandable and has a nice ring to it, I think we all know it is not practical. But what is feasible is less austerity; what is necessary is more growth. If my thoughts that I share with you today have any lasting effect on the debate and policies, and the road ahead, then I hope the need for such demonstrations will, in fact, begin to diminish, as despondency is replaced by hope and despair by new opportunity.

It is easy to be here today and feel a sense of déjà vu. Look at recent events: Greece has passed legislation authorizing a new round of difficult austerity measures, despite widespread popular discontent. Eurozone officials profess their support, but fail to release urgently needed funding. The Greek economy and others contracts at a pace greater than anticipated, raising questions once again about debt sustainability. Banks are short of liquidity and borrowers are short of credit. Observers, and even some officials, raise questions about the future of Greece as part of the Eurozone, while the Eurozone itself struggles with fundamental flaws at the heart of its architecture. These all seem to be features of a very familiar landscape. Stretching back over three painful years, we have seen each of these developments, each of these moments, numerous times over just this relatively short thirty-six-month period. Is it really only three years? It does seem a lot longer, I know for me and I am sure for you. But if we step back from these realities, as repetitive as they may seem, we can see a bigger picture now that augurs well, I think, for both Greece and Europe that suggests that Greece and Europe may be approaching a new set of opportunities.

In Greece, for example, we see for the first time since the crisis erupted a popularly elected coalition government, with broad representation across a wide political spectrum and with a significant parliamentary majority. This government has passed two sets of legislation that present a comprehensive framework. We now have what I believe is a comprehensive framework for deeper reform and for further adjustment of the Greek economy. In addition, and in stark contrast to where we were last November 15th, Greece now has the benefit of an unprecedentedly large reduction of its sovereign debt, as we all know: EUR107 billion eliminated, equal to roughly one-half of the size of the Greek economy, almost one-third of the total sovereign debt. And there has been a dramatic stretching out of another EUR70 billion or so, at highly concessional rates, I might add, rates which, as you know better than I, have cut into the capital of many banks very severely.

Thirdly, and again to differentiate this moment from many that we have seen in the past three years, as stability and confidence slowly return deposit outflows have begun to reverse. Again I speak under your control, because you would know this much better than I, but one can see in the data and one can see in the behavior of Greek citizens, and potentially non-Greeks, a willingness now to bring money back home or, perhaps equally importantly for the banks, to bring it out of the closets and out from under the mattresses.

Finally, there are, if one listens carefully and puts one’s ear to the ground, faint indications that the economy may be approaching a bottom. And the value of Greek debt, for perhaps various reasons, has also shown some signs of life since mid-year. At the European level there are also new developments of note, new straws in the wind, which go beyond the pattern of the last two to three years: a euro area funding mechanism, a standing one, a long-term one, the European stability mechanism, is now finally up and running, with prospective firepower of EUR500 billion. Important steps are finally being taken to create a Eurozone-wide approach to banking, including a single supervisor and direct recapitalization of banks by the ESM. And the ECB has shown real leadership, by launching an innovative instrument: outright monetary transactions, or OMT, with truly powerful potential, to begin break the stranglehold that uncertainty and indecision has had over European sovereign debt markets. These relatively new features do give us reason to hope that both Europe and Greece may be finally heading clear of the rocks, steering toward safer waters, and eventually even – and I know this seems a little bit far off today – smoother sailing.

However, for this potential to be realized, both Europe and Greece will need to steer a new course, to find a better balance between austerity and growth, between short-term fiscal discipline and long-term expansions of output and employment opportunities. A return to real sustainable economic growth, in my view, can be the only genuine solution to Greece’s economic and debt problems and to Europe’s difficult crisis. It is, in fact, time to recognize that austerity alone condemns not just Greece but the whole of Europe to the probability of a painful and protracted era of little or no economic growth. We see this affecting virtually the entirety of the Eurozone today. And if you look at the recent economic data, not just for Spain, Greece, Portugal, Italy, Ireland, but for France, Germany and even the Netherlands, you see data that is not overly encouraging. If this protracted era unfolds, as it could, it would be a tragedy not just for Greece and for Europe, but for the rest of the world, which has now been so clearly and palpably drawn into the euro crisis.      Let me begin by making some key points, to set the stage for my suggestions.

First, I think we need to clarify Greece’s record, not to whitewash it, not to make excuses for it, but at least to try to clarify it. There is a conventional wisdom, which I hear virtually every day and which you may hear virtually every hour. It is often reinforced by some in the media, by random comments of market commentators and economists and of course, regrettably, occasionally by disparate officials. It is a conventional wisdom that Greece has not performed under its program. How many times have I heard: “Once Greece gets back on track…”? A thousand, ten thousand, a million? There are, of course, undeniable elements of truth here. Revenue collection and reforms have lagged. Privatization is just barely under way, and other structural reforms have been caught squarely in the cross rims of political change. But I think we need to recognize, visibly and forcefully, that this is not the whole story.

Greece’s progress in reducing its fiscal deficit is in fact one of historic proportions. Adjusted for cyclical effects, Greece’s adjustment, just for the period 2009-2011, was virtually unprecedented in recent economic history, amounting to over 12.5% of GDP. Moreover, this happened while the Greek economy contracted to an extent rarely seen since the Great Depression, accumulating now to roughly 20% of GDP by the end of this year. Debt reform still marches on. That Greece clings to the mantle of the euro with tenacity is testimony to the resilience, fortitude and courage of the Greek people, people who have made considerable sacrifices and, despite fatigue, have shown resolute determination to rebuild their country. They have demonstrated an impressive willingness, despite the clamor. If you look underneath the noise, you see impressive willingness to bear short-term pain for long-term gain that will one day come from the structural reforms, almost a structural dismantling and rebuilding of the Greek economy.

And as tribulations continue to unfold these very days and weeks, I am pleased to see that some are stepping up with humanitarian support for the Greek people, such as the recent initiative launched by George Soros to provide emergency food and services to needy Greek citizens. I would also pay tribute to the governments which have guided Greece through these last three tumultuous years. I had the privilege of living here in Greece as a young naval officer in the early 1970s. As all of you know, this was a dark period for democracy in Greece. But the Greek economy functioned, and rather well, in many respects, and at the heart of it was a wide sense of entrepreneurialism among the Greek people.

As a young ensign, I landed the ship on which I served in Piraeus harbor. And we had a boat, a small boat, on the ship, which was severely in need of repair. Typically these repairs would be done by a governmental shipyard in Piraeus, but they were booked up for three weeks. And the captain, rather desperate, because we were only here for two days, said, “Ensign Dallara, get this boat repaired.” It was a small boat, but it took the officers ashore so they could enjoy the evenings and the nightlife of Athens or Piraeus or wherever they wanted to go. I couldn’t quite know where to go. I took the boat ashore and I looked for someone who looked like they could help me. I found a man who ran his own ship repair business. And within less than twelve hours I had that boat back in shipshape, the engine repaired, ready to go. The captain was impressed. And from that point on, for the next two years, when we needed repairs on our small boats, we didn’t go to the government shipyards. We went to that Greek entrepreneur.

I would pay tribute to the Greek people, while recognizing that that sense of entrepreneurialism has suffered in the intervening years from a state approach, which at times has been characterized as paternalistic, clientelistic, and that has eroded some efficiencies of the Greek economy. I think if we are honest, we recognize that this is a serious problem which lies before Greece today.

However, since the onset of the crisis in the fall of 2009, successive governments of Prime Ministers Papandreou and Papademos, while very different in their political texture, both set Greece, I think it is fair to say, on a path of facing reality and tackling imbalances that had accumulated over the years. Both governments made progress in the face of huge adversity and deep skepticism that we find in many corners of Europe and global markets. Under the leadership of Prime Minister Samaras, the current coalition has exceeded the expectations of many in moving forward the additional measures needed to carry on the important work done by predecessors and to frame and implement a more comprehensive reform, enacting pivotal legislation in recent days.

Returning to Greece’s economic performance and conventional wisdom, it is also worth citing that Greece has now more than fully reversed a 27% loss in competitiveness—external competitiveness—since Greece adopted the euro in 2001. Much of this gain has occurred only of course in these last few years, due in part to the intensity of the fiscal effort, to the effects on labor demands and wages and compression, as we know, of private-sector, and to a certain extent public-sector wages, lowering unit labor costs by more than 15%. Some of this restoration of competitiveness has been due to structural reforms, and more of that will come. And some, of course, has reflected the depreciation of the euro itself.

If Greece perseveres with the structural reforms embedded in the revised program just embraced by the Greek Parliament and the Greek government, if Greece can unlock again the creativity and potential that exist here, there is no reason to believe—and some may hear these comments with a deep degree of skepticism but I don't share it—there is no reason to believe that Greece cannot become one of Europe’s more competitive economies. With unemployment today, however, above 25% and output having fallen 20%, the adjustment Greece has endured has been nothing short of brutal. It has brought tremendous stress to the Greek society, as has the need to hold two difficult elections and the repeated pressures to enact painful legislation.

While I would question whether these measures have always had the correct balance, their passage points to a nation which recognizes the need to rebuild credibility, to take the long view, a view that the future of Greece remains firmly within the future of the euro. In contrast to some other countries, it is worth noting, as we talk about Greece’s accomplishments in recent years, that the banks here did not bring down the sovereign. In fact, it is a tribute to their underlying strength, to their solid position, to your solid position, I should say, leading into the crisis and to your remarkable resilience during the crisis that the sovereign has not in fact brought down the banks.

It may seem like a distant memory to some of you in this room, but I am sure, if you reach back, you will recall that, entering the crisis, Greek banks had impressive levels of capital adequacy, with core Tier 1 ratios of 10% or more, well above those for banks in the US and the rest of Europe. Performance was also strong. Return on equity before the crisis ran near 15%, compared with only 10%, on average, in the US and the rest of Europe. Greek banks now face, of course, capital shortfalls, liquidity pressures and inevitable increases in non-performing loans, after incurring the heavy losses earlier this year, due to the restructuring of Greece’s sovereign debt. Nevertheless, they are still alive and are poised—you are still alive and poised—for a comeback, if this recapitalization is done in the right way.

Greece now urgently needs a strategy with a greater emphasis on growth. Europe needs the same. Despite the key decisions taken since June, Europe’s future will hang in the balance so long as doubts remain over whether Greece will stay inside the euro, fueling contagion elsewhere in the Eurozone. What should this new strategy involve? It’s easy to talk about growth. Politicians, bankers – we do it all the time, right? It’s a very nice, appealing concept. But what are the concrete elements that can lead to higher rates of growth here? I will stress five key ingredients.

First, more gradual fiscal adjustment; secondly, additional financing to support this adjustment ( I am sure this particular element will be well received up north); accelerated public investment; intensified structural reforms, including improved tax collection, streamlining the size and scope of government, social spending and entitlements; product and labor market liberalization, where starts had begun but have not been sufficient, and under this fourth heading of structural reforms, determined moves finally on privatization; fifthly, of course recapitalization and adequate provision of liquidity to the Greek banking community, to enable them to provide the credit expansion needed to stabilize and eventually grow the economy.

Allow me to take a few moments to make the case for each of these ingredients of a more growth-oriented strategy. And I will particularly focus on the first one, which is most challenging, politically and economically, a more gradual fiscal adjustment. Greece’s fiscal effort, which has contributed to much larger contractions of economic activity and the tax base than had originally been assumed – just a few numbers illustrate this powerfully:

Real GDP fell over 11% over the first two years of this period, rather than the 6.5% which had been assumed in the original Troika-designed program. Domestic demand fell by 15%, in contrast to the programmed 12%. Real wage incomes fell by 15%, rather than 7%, and unemployment rose to 25%, in contrast to 15%. This weaker performance caused revenues to fall far short of projections, time and again. Non-interest government spending, as a result, ended up having to be cut by EUR20 billion, just from the period 2009-2011, more than five times what was originally targeted. Now, many of you are painfully familiar with this data, but I repeat it here to make the case for what I believe is essential, a more graduated pace of fiscal adjustment.

Financing was limited, and the harshly negative effects of these cuts on incomes and spending were obviously a major reason that the economy has weakened so much. This became a vicious circle, in which revenue shortfalls prompted further spending cuts that weakened revenues again and triggered the need for more spending cuts. All the while, we saw repeated revisions of debt-to-GDP projections, delays in programmed disbursements, growing frustrations both in Greece and throughout the Eurozone, and a growing sense, that was not at all entirely merited, that Greece simply could not perform. The fiscal and competitiveness data we have cited demonstrates otherwise rather convincingly, but when you set unrealistic targets and you fall short, you should expect that there will be disappointment and frustration.

As we sit here today, the official creditors have advised all of us, including the Greek government, that they anticipate a further contraction in Greece’s economy of 4-5% in 2013. Now, one can debate the precise number there. But it is my view that everything must be done to avoid this reality, which is looming just around the corner. The first step has been taken with the extension of the fiscal targets by two years, now approved by Eurozone ministers. But I think we know that this will not be enough. This new program assumes a decline of 4-5% in 2013, in part because two-thirds of the additional fiscal adjustment, which has been negotiated for this two-year period 2013-2014 is frontloaded to next year. What is needed instead, in my view, is to ease the pace of the remaining fiscal adjustment to something closer to that of Ireland, which has been moving steadily forward with annual reductions of roughly 1.5% per annum.

Now, Ireland’s starting point was not quite as severe as that of Greece, but it was not pretty. And yet they have been benefited from a program framed by the Troika, which has allowed a more gradual pace. The benefit of this is not just that it reduces the drain on demand, the drain on the domestic economy, but it enables the sovereign to build a record of accomplishment, rather than a record of not quite measuring up. These approaches of a more moderated approach can have a positive effect on market confidence, on the perception as well as the reality of performance, including Greece’s case, put Greece on a much more plausible path for early restoration of market access, and yes, indeed, this phantom goal of debt sustainability.

We do know, of course, that Eurozone countries have already shouldered a substantial burden in supporting Greece and that the creditors may feel that this approach leaves an additional burden on their shoulders. I think we should all appreciate how difficult mobilizing Eurozone support has been, requiring the creation of new lending instruments, new institutions that violated, in the eyes of some, fundamental EU principles, even violated, in the minds of some, treaty obligations. But I think we should recognize that much of the new lending by the ESFS has been earmarked to finance principal repayments to the IMF and the ECB that will total EUR39 billion through 2014. And, of course, some of this has been earmarked for the recapitalization of the banks and some was earmarked to encourage and to be an essential component of the private participation in the bond exchange that so many institutions here and others that we represented agreed to.

Including funds available from the IMF, the current amounts left over for Greek deficit financing over the next few years is limited to only EUR22 billion. Now, even this may seem a substantial figure, but it is not even sufficient to cover Greece’s interest payments to these same official creditors. I’ve seen this movie before. It was called the Latin debt crisis during most of the 1980s. Now, of course, the comparison—the analogy—is a flawed one. But I can personally recall, having been a mid-level officer in the US Treasury during some of those years, and then at the end of that period a more senior officer responsible for international affairs at the Treasury, I can recall the difficult negotiations that took place over reform programs guided at that time by the IMF. After months of intense debate and wrangling, bank creditors often agreed to extend new credits to Latin debtors. The amounts at first looked impressive, nominally, but it soon became evident when you looked carefully at the numbers that the new funds were not even enough to cover repayments to the banks plus the interest obligations. Inevitably, the Latin economies continued to contract. Austerity set in, and political and social strains grew.    They had the benefit of their own currencies, but not so much was realized, because hyperinflation set in, in many of these cases, as you know.      It took the Brady Plan to change the dynamics of the Latin debt picture, wiping out the debt, significant portions of the debt, of many of these countries.

I do not suggest for the moment that a similar approach is needed for the whole of the Eurozone, but clearly here in Greece, just as the Brady Plan changed the dynamics for Latin America, Europe needs to find its own way to change the dynamics for Greece. Cutting interest rates on existing and prospective EU and IMF lending, cutting those rates to funding costs for these organizations, would be a good place to start, in my view, and next week would be a good time to start. This would not increase meaningfully the burden on European taxpayers, but would give meaningful debt service relief to Greece, recognizing that the ECB is a monetary and not a lending institution. There is nevertheless, even for the ECB, both scope and need for them to work with Eurozone governments to commit to transfer back to Greece their full share of ECB profits on holdings of Greek bonds. And I would also encourage the ECB to consider steps to avoid Greece making substantial net repayments to the ECB.

The IMF, for its part, should be clear that Greece’s exceptionally difficult circumstances merit concessional terms on IMF credit, as well as other official credit. The IMF has been right, in my view, to force a debate on what the official sector can do to support Greece, the debate on so-called OSI or official sector involvement. But the IMF has not adequately recognized that it needs to be part of looking at its own policies. The IMF currently has a program wherein certain countries are eligible for IMF lending at zero interest rates. Now, this is limited today to countries of low-income status.

Do we really want to wait until Greece falls in this category to recognize that the extraordinary circumstances surrounding Greece today justify some thinking out of the box when it comes to IMF lending policies? There are those who say this cannot be done. I was on the board of the IMF for five years representing the largest shareholder, and I dare to disagree. It takes a little creativity. But it also takes some willingness on the part of the IMF shareholders to recognize that there is more clearly a case and scope for the IMF to play a larger financial role in addressing not just Greece’s problems but Europe’s problems.

From the outset there was thinking, on both sides of the Atlantic, that the problems of Greece, the problems of other countries such as Portugal and Ireland, could be handled by Europe. European officials said for quite some time, “This is our problem. We’ll take care of it.” The IMF was uncertain how to move, not being very welcome or invited, in the early days of this crisis. Today those dynamics have changed, but not enough, in my view. If you look at the disbursement which is expected soon in support of Greece’s program, I believe it’s in the range of EUR31 billion. How much of that is being provided by the IMF? Three to four, I think? If you step back and think about the IMF’s role here, and how important it is for the IMF to help stabilize Europe, there is a strong case that the IMF should actually not just find a way to reduce its interest rates, its interest charges to Greece, but also find a way to increase the scale of its own financial commitment.                 Now, the US administration has been somewhat ambivalent about this. But with elections behind us in the United States, I hope that this ambivalence will turn to a more active approach. Latin countries, and even a few Asians, have said time and again to IMF leadership, “We think Europe is a wealthy region and it should take care of its own problems.”

I am particularly disappointed at a few of the Latin countries who benefited so much from IMF support during the 1980s and the ‘90s. Let us ask one basic question, as we look at the painful process, highly political process, of mobilizing funds from Eurozone governments, and transport ourselves back 20 years to the United States and Latin America. What if Europe and Asia had said to the United States and Latin America, “This is your backyard. This is your problem. Finance it out of the US budget. You’re wealthy. This is your region. These are your neighbors.”? I can tell you, the politics would have been utterly unmanageable, even worse than they are today in Europe, in my view, and the Latin economies would have eventually collapsed. Venezuela would not just be an isolated case. We could have a region of countries like Venezuela, if I may put it so frankly.

But the IMF was allowed by its shareholders—yes, under the pressure of US leadership—to extend ample credits, not just from the US balance sheet but from the IMF balance sheet. And there is a beauty here which the technicians among you will appreciate, but somehow it has eluded the debate: When the US has to go ask for budgetary funds for Brazil or Mexico, when the Commission has to go to Berlin, to The Hague, to Helsinki, to ask for funds for Greece, it becomes inevitably a highly political process. The IMF funding does not involve budgetary outlays. It may seem like a simple technical accounting distinction, but it is profound. How much pain do you think was placed on the US budget deficit by the endless lending the IMF did to Latin America during the ‘80s? I can tell you how much: zero. Because we have this beautiful technique called an exchange of assets. The Governor and many of you here know of this concept.

My point is that we need to utilize the IMF more, not just because of the strength of its balance sheet today, refurbished with over EUR400 billion which are going nowhere, but we need to leverage the apolitical nature of IMF check writing compared to the highly political nature of Eurozone check writing. Let me turn to a few other key areas, because I wanted to dwell on this point in particular, and talk a bit about some of the other key ingredients. And I’ll be brief, and you can read perhaps in more detail from the written version of my speech, which will be provided at the conclusion of my remarks.

A few words about the case for public investment, because utilizing the additional fiscal space that could be afforded by more moderate adjustment paths, in conjunction with accelerated drawing on unused EU structural funds, economic growth would be better supported. Public investment, in turn, would add significantly to supply, and support demand the labor-intensive construction. Revenue shortfalls should not be allowed to snuff out investment spending. Otherwise, growth will be virtually impossible to restart, even with a more moderated fiscal path. Therefore, the call is a strong one for increased flexibility by the EIB, intense efforts by both the Eurozone and the Greeks, and prompt restructuring of project finance deals designed for a more robust economy – all of this could lead to substantial job creation, not in the distant future, but by the end of 2013. Highways still need building, metros still need to be completed, ports need expanding. But the structure of these deals needs an immediate overhaul. And this can be done. The resulting stimulus would make recovery much more likely after mid-2013, adding perhaps as much as 2% to GDP, from 2014 onward.

Turning to Greece’s structural reform efforts, this is something, I think, on which we could all agree. Greece has made strides in some areas, especially pension reform and labor market liberalization. The passage one week ago of a wide-ranging package of new reform commitments has now set the stage for meaningful breakthroughs on longstanding structural reforms. Areas such as tax collection, liberalization of product and services and privatization should now be at the top of the agenda.          If Greece is to expect serious consideration by the Eurozone, the IMF and the ECB of some of these ideas and Greece’s pressing needs, then both the Greek people and Greece’s creditors have every reason to expect a more determined effort during the years ahead on these crucial reform waterfronts.

The Greek people deserve an economy that is not burdened forever by a heavy bureaucracy and what can arguably characterized as a bloated public sector. Key ingredient number five in this reform and growth agenda is bank recapitalization, the importance of which I need not stress with this audience. Recapitalization soon, with renewed commitment by both the Greek government and its official creditors, is needed to enable Greek banks to renew credit expansion and to attract private capital. In my view, this can be done with approaches that can help mitigate the adverse effect on capital to Greek banks from the sovereign debt restructuring. And there are ways to do that without creating equity problems with non-Greek banks. For many, many months I represented those non-Greek banks in these negotiations.

And while I don't mean to point fingers, there was and remains a fundamental distinction between the Greek banks and the non-Greek banks in regard to their development of their balance sheet exposures to the Greek sovereign. We know that; you know that. When you are embedded in the Greek economy, as all of you are today, you have no choice but to build a balance sheet, which you are still doing—if not building, at least preserving—as part of the broader effort to stabilize the Greek economy, to build a balance sheet of GGBs. If you are sitting in France, or New York, or London, or Munich, it is much more a matter of choice. I think that, at the same time, we should look for an early reflection by the ECB on its current liquidity policies toward Greek banks, which involves today an extra charge of more than 200 basis points, at a time when the Greek economy can ill afford this.

Let me spend just a few minutes, in conclusion, by talking about the course corrections that are needed in Europe, alongside those we have been discussing for Greece. I think we all know that Greece has become the poster child for Europe’s sovereign debt problems, because of the severity of your economic imbalances. But we also know that Greece’s problems cannot eventually be fully resolved without fundamental changes in the structure and modus operandi of the Eurozone itself. The policy decisions taken so far this year certainly provide a firmer fiscal foundation to Europe’s monetary union. Full fiscal mutualization, including Eurobonds, would seem, arguably, a lasting technique to resolve the crisis.

However, I think we must face reality, that with 12 of 17 euro countries in the excessive deficit procedure today, and with only four with government debt below 60% of the Maastricht guideline, mutualization is a long way off. Stronger fiscal rules are a necessary precursor to the ultimate aim of fiscal union.      It is therefore vital that ratification of the fiscal compact be completed, and that work is advanced, and completed, on creating a Eurozone-wide framework for banking, which should involve not only the establishment of a single supervisor and agreement on a common deposit framework, but also a Eurozone-wide resolution policy. These changes, we know, will be extremely difficult, time-consuming, because they are economic, financial and political in nature. Markets should not expect, realistically, near-term agreements, but they have every right to expect a clear roadmap and timetable that can frame positive expectations as negotiations proceed.

In the meantime, however, partial mutualization, limited to bank recapitalization cost, should be helpful, sooner rather than later. European leaders obviously need to resolve differences about timetables and which institutions would be covered in these bank recapitalization policies, as well as how to deal with legacy losses. This is something that should be on the front burner of Eurozone meetings today, in my view.

Many of the suggestions we make today, of course, regarding the program for Greece have relevance for other sovereigns under stress. Moderated paths of fiscal adjustment, supported temporarily, as needed, by additional financing. And I stress “temporarily,” because I am convinced that the course change we have suggested here today for Greece will not lead, over any reasonable period of time, to a net burden on the rest of the Eurozone—far from it. It will bring forward the day when the Eurozone can be released from the burden of endless cycles of additional financial support for Greece.

Similarly in other countries the current paths of ambitious deficit charges, needing frequent modifications, accompanied, as we see, by virtually collapsing private investment and a dearth of private credit, do not look to me like recipes for success. Neither is undue concern about debt-to-GDP ratios, as evidence of debt sustainability, especially where the denominator, the GDP, is under such pressure, in part because of excessive concern with unachievable deficit reduction. I could go off on a long tangent about debt-to-GDP ratios, but I shall not.               But let say, however, that, just as in Greece, steady progress and discipline in reining in fiscal deficits elsewhere in the Eurozone is essential. But it cannot alone do the job.

I have been recently to Madrid, to Dublin, to Rome. The circumstances there, in each and every case, are difficult. But a course change in the way Europe thinks about the balance between austerity and growth cannot only be very meaningful for Greece but for all of these countries. Indeed, it could turn what threatens to become a vicious spiral of stagnation into a virtual circle of stronger growth and improved government revenues, feeding into better job prospects and stronger profits for corporation, and even—perhaps we should not say so loudly—for banks. Achieving this will require vision, courage and determination. Europe’s leaders now need to demonstrate that they have plenty of each.

Two final thoughts: This new course requires not only revised financial calculations and an adjustment in the mix of economic reforms and the balance between reform and financing, but it also will require two very elusive ingredients that have been missing, in my recent experience and I suspect those of many of you. Those ingredients are greater trust and mutual respect. Experience tells us that trust must be earned. But if we step back and reflect upon the last three years and look at the real track record, if we look at the experience of Greece and its creditors, both public and private creditors, an experience where all have gone down a difficult road together, I think we should recognize, perhaps somewhat begrudgingly in some cases, that each side has done enough to earn a meaningful degree of trust. What is now needed is to build on that trust and to create a true partnership which can overcome the challenges that remain. Without this sense of true partnership, Europe is unlikely to progress during this difficult period.

It has been argued, of course, and one hears this frequently, that in the end the problems facing Greece must be solved by the Greek people. But in reflecting upon that sentiment, I am reminded of words by the English romantic poet Percy Shelley. As many of you know, Shelley was a man who revered all things to do with classical Greece, its values and in particular its democracy and its sense and record of independence. Of course we live in a very different era today than the era of Shelley, two centuries later. However, many citizens of Europe, and indeed many citizens of other countries around the world, including my own, have made strenuous efforts to contribute to the solutions of Greece’s economic problems these last few years, have tried to help Greece build a stronger future.

Indeed I know that I speak for many when I say that those who have been privileged to take part in this effort fully associate themselves with Shelley’s resonating statement that we are all Greeks.


Following his speech, Charles Dallara answered questions from the audience:

JOURNALIST (CHINA XINHUA NEWS AGENCY): I would like to ask Charles: Do you think it is a good time to invest in Greece? What is your comment to the investment environment of Greece? Thank you.

MR. C. DALLARA: I think we are approaching a time when investment opportunities in Greece will become increasingly visible and attractive, both to Greek citizens and to non-Greek citizens. I can sense, just during my short visit here, that foreign investors are either moving in, looking at opportunities, or reaffirming their stakes. We saw recently the announcement by Unilever that it was augmenting its activities here. And I think that, as the reality of Greece’s restoration of competitiveness becomes more evident, and as confidence grows about Greece remaining in the Eurozone, this is key, because investors are not going to want to come in to a new world of drachma. They want to come in to a world where Greece is firmly embedded in the Eurozone.

And I think, as that debate, hopefully, moves behind us, then I think we will see growing investment opportunities. I believe the privatization program here is key, not because I believe it will generate huge amounts of revenue for the Greek budget. Over time it can be significant, because it will demonstrate the commitment of the government to follow through on its reforms, and the recognition that government ownership in Greece has involved many inefficiencies, to put it mildly.

JOURNALIST (FRENCH NEWS AGENCY AFP): I wanted to know what type of official restructuring you will recommend, with haircut or just interest rates and maturity?

And the second question is: Is there something else that the banks can do for Greece, after what you have already done?

MR. C. DALLARA: Today on how the official sector can augment its support for Greece is primarily by reducing the interest rates on both previous and new credits. This can amount to meaningful improvements in Greece’s debt-to-GDP ratios and meaningful diminution of their financing needs. The data that I have pointed out underscores how much of the new lending to Greece is going to service and repay prior debts. We need to change this dynamic.

I believe it is up to the Eurozone and the IMF to find the right mix of either reductions on interest charges, which I would emphasize, or perhaps some extension of maturities. But I really don’t believe the debate about across-the-board haircuts in the value of official credits at this stage is productive. And I don't think it is necessary.

Debt remains a legitimate concern. But to paraphrase my favorite book by the British author Graham Greene, debt is no longer the heart of the matter here. It is growth. And I think that’s where the emphasis needs to be placed.

MR. M. KYRIAKOU (KPMG): I think we discussed and we have heard many times the word “growth,” which is the only way out of our present problems. As we all know, growth cannot be legislated or dictated or in any way put forward without the support of either the public investment or the private investment. Simplistically, one of the two has to make investments, so that we can begin to grow our economy. It seems as though in the current situation public investment is either non-existent or very restricted, and therefore we have to rely more on private investment.

Or alternatively—and this is my question—whether new deliberations and new discussions, instead of the foreign governments giving Greece money which we have to repay at some point, then burdening us with further interest costs, whether they can direct to Greece investments, in which case first of all there would be the growth coming out of those investments. So instead of giving us handouts to actually do something that can benefit both them and us.

And secondly, if they do this, it will generate a climate of investment which will encourage other Greek and foreign investment into Greece. I think we need to do that, otherwise the current climate, which is one of despondency and one of concern, I think will take a long time for us to move to the question of growth. So perhaps in your deliberations you can support that type of idea, that foreign governments can influence investment into Greece. Thank you.

MR. C. DALLARA: Well, let me just say briefly, and reiterate a point that I made in this speech, that I completely agree with you.

The second point in my list of five key ingredients of a more growth-oriented strategy here is to mobilize investment. And I think that at this stage, pragmatically speaking, public investment has to lead the way. But it can be done, in some cases, by restructuring partnerships which are on the books but are no longer viable. There are ample bankers sitting in this room today who, with a mandate and cooperative civil servants not bound by rigid rules but who are determined to mobilize investment, could reboot some of the deals that are on the books for investment in Greece today within 90 days, and have money flowing within 180 days. This could make a huge difference, in my view, in creating a climate of investment. It will take time for private investment alone to come back. But I think foreign investors are looking. They are not yet ready to move. They need to be absolutely confident about Greece’s future in the euro.

But in the interim European governments can make a statement about their own commitment to Greece, not just by extending loans, which are designed either to help private creditors or to recapitalize banks or to repay their own prior loans, but by focusing on freeing up investment funds. There are funds there in the EU structural funds. The EIB has much greater capacity that is being utilized today, but it takes creativity, and it takes flexibility. And it takes thinking out of the box. And I think that’s what we need now. And we need it as a matter of priority. I’d like to see these things not just become a signature in a Eurozone communiqué, but they become a matter of real drive and determination.

MR. DAVLOS (SKAI TV): You mentioned that a key issue is growth and not so much the debt problem. Many people claim that the measures taken as well as the budget will not contribute to growth and that they will probably deepen the recession. Do you agree?

MR. C. DALLARA: I admire the government’s determination to pass the budget, which has just moved through Parliament. But I do share the concern of many that the current path will not produce growth in a sufficiently timely fashion, to stabilize expectations and to begin the process of renewing hope in job creation in Greece today.

Therefore I do argue, and tried to outline that in my speech, for a course adjustment which would moderate the path of fiscal adjustment and allow some breathing room for this economy, so that the pace of fiscal adjustment is set on a more realistic course and targets can be met, and not undermined by revenue shortfalls and repeated bouts of economic weakness.

We talk about the debt problem, and it remains a serious problem. But you would be amazed at how soon those out-year debt-to-GDP ratios can improve, if you start looking at rates of growth of +2-3% rather than -4-5%. Then we won't find debt-to-GDP ratios constantly running away from us, making us feel that we are chasing rabbits down endless holes, which is certainly the way that I felt at times in the Greek debt negotiations.

MR. V. DOURAKIS (ALPHA TV AND RADIO): Since we have referred to debt and growth, I would like to ask: Why do you believe that an OSI would not be effective, as a haircut of the debt at this moment would probably release funds which could return to the Greek economy and eventually fuel growth? Thank you.

MR. C. DALLARA: My concern is that an official sector haircut along the lines of what the private creditors negotiated with Greece would be politically combustible throughout Europe today. Maybe there will be a time when Greece’s debts can be processed in a low-key way to the Paris Club, but now is not the time, not when Eurozone governments are being asked for another EUR10 billion here, another EUR20 billion there.

I don't think, to be quite honest, the politics work, and I think that the incremental financing requirements of the approach that I sketched out, supporting a more graduated path of fiscal adjustment, sometimes the Irish do know what they are doing, even though I am half Irish and I speak from experience that they also can make their mistakes. But I would say an Irish path of fiscal adjustment, 1.5%-2% a year, not 4%-5% a year, is much more compatible with social and political stability, and can create room for new investment funds.

The augmented financing requirements are not at all substantial. And the payoff of enabling Greece to set a path for a true escape from dependency, a mutual dependency which is not healthy at all, between Greece and other Eurozone countries, I think can be realized without a dramatic, across-the-board haircut. Again, it reflects in part my view that the heart of Greece’s problem today is not a debt problem. It is a serious problem, but we have to put it in perspective and realize that, without a stabilization of the economy and a renewal in growth, we will never achieve debt sustainability. Let’s face it: We can cut debt left, right and center. But there will always be some, and it will always look ominous if the economy is contracting at a 20% clip every three years.

Maybe one final question, and then I think we should not burden the audience further.

MR. T. KOUKAKIS (TA NEA NEWSPAPER): Do you believe that if we use public assets for financing the debt buy-back we can more effectively reduce the debt?

MR. C. DALLARA: It’s a difficult question. I think one can debate legitimately the potential benefits of a modest debt buy-back program. But whether it’s an efficient use of resources, rather than channeling funds, scarce funds, scarce resources, into investment, is a real question.

You have to believe, in order to mobilize substantial funds for debt buy-backs now, which in my view should only be done on a purely voluntary market-based basis, purely voluntary market-based, in order to mobilize funds for that, you have to divert funds from other uses, including investment in the Greek economy, which I am somewhat doubtful about. And you also have to believe that this will clear the cloud, trigger a new day. I think growth is what is going to trigger a new day here, not further efforts to reduce the debt alone.