Deal or no deal: The Greece standoff

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Question 1:  

Do you agree that, on balance, the implementation of the agreement as outlined in media reports will have a non-trivial negative effect on Greek GDP?

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Question 2: Do you agree that Greece would be better off defaulting right now rather than signing to the agreement under consideration?

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Question 3: Do you agree that implementation of the agreement will lead to an expected decrease in Greek debt repayments?

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Last week (week of June 22nd), the Greek authorities presented a new proposal to its creditors, consisting of increases in contributions to the government pension scheme,  a widening of the 23% VAT rate (but a reduced rate of 13% on energy, basic foods, catering and hotels), an increase in the corporate tax rate from 26% to 29%, an increase in the "solidarity" income tax rate that had been initiated under previous bailout programmes, and a reduction in defense spending. Details can be found at  http://www.theguardian.com/business/2015/jun/23/greece-debt-crisis--offer-athens-details.

Although the survey asked panel members about the economic consequences of this particular proposal, the answers of several panel members were focused on countercyclical austerity programmes in general.

The survey asked three questions - and 37 economists participated. These are the headline results:

A large majority of respondents think that these types of measures would have non-trivial negative effects on Greek GDP. Moreover, a majority thought that such measures could actually reduce the amount of money that creditors would eventually receive, for example, because it would have negative effects on Greed GDP.

Although quite a few respondents think that Greece could just as well throw in the towel and default on some of its debt right now, the majority think that this would not be beneficial right now.

 

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How the experts responded

Proposed agreement and Greek GDP

Participant Answer Confidence level Comment
Wouter Den Haan's picture Wouter Den Haan London School of Economics Strongly Agree Very confident
It simply does not make sense for a country to pursue such a exceptionally strong counter-cyclical fiscal policy even if that country is in need of structural reform.
Wendy Carlin's picture Wendy Carlin University College London Agree Confident
Agreements of the degree of harshness that seem likely, would be expected to further weaken the Greek economy and leave high levels of uncertainty.
Gianluca Benigno's picture Gianluca Benigno London School of Economics Agree Confident
Previous agreements as in the past five years have shown to be unsuccessful in addressing the Greek situation as debt to GDP ratio has increased rather than stabilizing and there has been a sharp contraction in economic activity with higher unemployment.This one does not look that different.
Patrick Minford's picture Patrick Minford Cardiff Business School Neither agree nor disagree Confident
This is really not the point. This agreement if it happens- which is likely; a further dollop of euro-fudge- will continue the current bail-out series under which Greece is pressurised by the Troika to make reforms which it refuses in practice to make but pretends to do so and in return receives loans which the Troika pretend will be paid back and yet clearly neither can nor will be. Under this series Greece has gone into recession and has no real prospect of recovery. With terrible supply-side policies, business confidence gone, consumer confidence similarly gone and government demand on mere life support, Greece has no hope. The current agreement will not change this.
Tony Yates's picture Tony Yates University of Birmingham Neither agree nor disagree Not confident
It depends what the counterfactual is. Relative to no deal, and default, this will have a positive effect on GDP for a few years at least, as I would forecast that the few years of autarky and financial collapse would be very painful. Relative to a situation where fiscal instruments were on their current settings, yet there was no default, it would have a negative effect.
Martin Ellison's picture Martin Ellison University of Oxford Agree Confident
Andrew Mountford's picture Andrew Mountford Royal Holloway Disagree Not confident
What I know about Greece is what I read in the newspaper but from this it seems that Greece's problems fit neatly into our current theories of economic growth which ascribe a large role in the ultimate determinants of growth to the quality of institutions. Greece's institutions are reportedly very poor, e.g. http://www.ft.com/cms/s/0/6c55d1ba-980b-11e4-84d4-00144feabdc0.html , and so the current deal in which Greece agrees to raise funds for partial repayment in return for large infrastructure investment from the EU seems like a move in the right direction, providing of course these funds are monitored effectively and not misused . (http://www.spiegel.de/international/europe/eu-commission-president-juncker-on-greece-and-tsipras-a-1039738.html ) The funds are intended to be raised, in part at least, from a tax on the wealthy i.e from those who had benefitted from the previous poor governance which also seems efficient .( http://www.bbc.co.uk/news/world-europe-33228119 ) Indeed,as an economist, one of the baffling aspects of the recent financial crises is the seemingly great desire among policy makers to insure ex post those who made bad investments. If the market's incentive mechanisms are to work then those who lend to people/companies/football clubs /governments who have little chance of paying the money back, must lose money. In this respect the situation of Greece is not unlike that of the people of a developing country who, on successfully overthrowing an oppressive military regime, are weighed down by the debts built up by the previous regime for the military expenditures used to subjugate them. As has been noted before by prominent economists, the prospects for development and world growth will be improved if lenders know that such “odious debts “ would not need to be honoured by a new representative regime. ( see e.g http://www.brookings.edu/research/articles/2003/03/spring-development-kremer )
Luis Garicano's picture Luis Garicano London School of Economics Neither agree nor disagree Not confident
The question does not have a clear counterfactual. The agreement is better than no agreement, the end of uncertainty post Syriza election is better than the continuation of the uncertainty. But certainly this agreement is a poor agreement in its focus on fiscal measures instead of structural reforms.
Jan Eeckhout's picture Jan Eeckhout University College London Strongly Disagree Very confident
Michael McMahon's picture Michael McMahon University of Oxford Agree Very confident
Fabien Postel-Vinay's picture Fabien Postel-Vinay University College London Agree Confident
This may be moot now, as it appears that the deal is not going ahead. Anyway, the contents of the Greek proposal - mostly raising VAT and corporate taxes, with a bit of reform of the pension system - mostly looks like a short-run patch to meet the demands of the Troika. If implemented, it is likely to impact GDP negatively in the short run. The longer run is difficult to predict.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Agree Confident
Based on current reports, much of the tax increases will be in the form of labor taxes, with increases as large as 4%-points. With unemployment in Greece at Great Depression rates, such tax increases cannot possibly help. Reform of the Greek pension system is important, but indiscriminate cuts decided in midnight meetings could also be very costly.
Ray Barrell's picture Ray Barrell Brunel University London Neither agree nor disagree Confident
The negative effects of the package are likely to be small. The deal appears to involve a tightening of fiscal policy of perhaps 1.5 per cent of GDP as compared to forecast, but a loosening as compared to previous plans. If everybody in Greece expected the forecast outturn then the current plan will be marginally contractionary by perhaps 0.5 this year as compared to what otherwise would have happened. Most of the changes are in indirect taxes and benefits, and multipliers for these are lower than for spending. The multiplier effect from the 'efficiency saving' component is likely to be zero. However, a deal my change prospects for Greece and for its tourist industry and it may overall be positive.
Sir Christopher Pissarides's picture Sir Christopher... London School of Economics Agree Confident
On the one hand the proposal is to tax businesses so the incentives to invest is negatively affected, and to raise VAT, so the incentive to spend is negatively affected. But on the other hand the uncertainty about Grexit is substantially reduced, and this is positive. I believe the negatives outweigh the positives but I am not super confident about it
Richard Dennis's picture Richard Dennis University of Glasgow Strongly Agree Confident
David Smith's picture David Smith Sunday Times Disagree Confident
The negative impact on growth from the measures outlined is likely to be offset in whole or in part by the positive impact of the removal of the uncertainty over Greece's continued membership of the euro, if indeed that is the case.
David Cobham's picture David Cobham Heriot Watt University Agree Not confident
There is a question about the appropriate counterfactual, and a question about the time frame: some short term negative effect relative to current values of GDP etc seems unavoidable but the medium term might be better, and the alternative of default might be worse especially in the short term.
Francesco Caselli's picture Francesco Caselli London School of Economics Strongly Agree Confident
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research Strongly Disagree Confident
Without an agreement I would expect the economy to relapse into a deep recession. With the agreement, depending on what is finally offered in terms of debt relief, there is at least a hope of an improvement. Therefore I think that the package will have a marginal positive effect compared to default and banking system collapse.
Alan Sutherland's picture Alan Sutherland University of St. Andrews Agree Confident
Christopher Martin's picture Christopher Martin University of Bath Strongly Agree Extremely confident
The reported deal requires Greece to maintain and even increase its primary fiscal surplus. This will maintain or even worsen the dire macroeconomic situation. This is not speculation. The experience of the past few years shows this will happen,
Jonathan Portes's picture Jonathan Portes KIng's College, London Neither agree nor disagree Not confident
It depends on counterfactual. Relative to disorderly default and political crisis, deal is preferable.However a much more comprehensive deal with less contractionary fiscal policy, substantial debt write off, and more product market and public administration reform would be greatly preferable
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Disagree Confident
The counterfactual of no agreement is likely to lead to even worse output in the short run with default and possible Euro exit. In the long run structural reforms are necessary and the debt levels are clearly too high both of which will bear down on output whatever happens.
Paolo Surico's picture Paolo Surico London Business School Agree Confident
Increase in taxation and decrease in spending are most likely to have contractionary effects on GDP. Still, the fact that the new proposed deal seems tilted (at least in words) more towards the wealthier part of the population is likely to make these contractionary effects slightly smaller than they would have been otherwise.
Morten Ravn's picture Morten Ravn University College London Agree Confident
Obviously without knowing the details, this is hard to answer. But to the extent that the deal involves higher corporate income taxes, higher VAT, and perhaps higher top marginal income taxes, the deal could further depress the Greek economy. Curbing early retirement and increasing pension contributions will instead have mild stimulative effects on the economy but only down the road and depending on exactly how pension contributions will be altered. It is disappointing that there seems to be no plans for further reforms of goods and labor markets which could help job creation. With youth unemployment shooting through the roof, it is pertinent that swift actions are taken to address the employment situation. This can only be done through making the Greek economy more competitive. I would have liked to see market reforms plus an attempt at emulating a fiscal devaluation but the latter is obviously only possible subject to a cut in public spending which appears off the table. It would also be good to actually check the extent to which past agreements on policy actions have actually been implemented. On the positive side, if an agreement is reached, which seems to be the case now, I would think that there is at least a short run positive effect due to the decline in the level of uncertainty.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Strongly Agree Very confident
Costas Milas's picture Costas Milas University of Liverpool Agree Very confident
The deal (under discussion) is heavily skewed towards tax (e.g. VAT and corporate tax) hikes. The deal puts forward a primary surplus of 1% in 2015, 2% in 2016, 3% in 2017 and 3.5% in 2018. Nevertheless, having a poor record in tax collection, it looks (at best) questionable that Greece will hit the targets largely via tax increases. Indeed, all governance indicators (published by the World Bank) currently rank Greece below Eurozone’s core and periphery. With this in mind, the deal under discussion looks more like the typical “extend and pretend” stategy. The deal will trigger a deep recession. But, will it be implemented? This is highly questionable. It looks strange to me that the current government, which came to power on the (false) promise of abolishing austerity, will work efficiently in implementing the deal. For the deal to have a “minimal” recessionary impact, work effectively and give hope to the Greek people, it has to be implemented together with significant debt restructuring. This very restructuring could take the form of a “dual mandate” of debt repayment in terms of GDP growth and governance improvement as follows: if Greece records positive GDP growth but no improvement based on the government effectiveness index (published by The World Bank), then the cost of servicing the Greek debt should be higher compared with the case where Greece records both positive growth and an improvement in the index. This mandate plan, will provide a strong signal that Greece “means business” and therefore address some of the concerns of its lenders.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Agree Very confident
Greece's short term problem is its 180 percent debt-GDP ratio. The additional proposed tax revenues will have little effect on this except as a demonstration of longer term intent. They will also further reduce economic growth in the short term. The key to Greece's survival in the eurozone in the long term - which is what further lending to Greece should be based on - is more fundamental reform to public finances and labour markets. For example, if raising tax revenues from labour income is so difficult then much higher VAT must be used to fill the gap on the mainland as well as the islands. And why wait until 2025 to raise the pension age to 67?
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme Agree Confident
Sushil Wadhwani's picture Sushil Wadhwani Wadhwani Asset Management Agree Confident
Sean Holly's picture Sean Holly Cambridge University Disagree Confident
Charles Nolan's picture Charles Nolan University of Glasgow Agree Confident
Difficult to know at the moment what is really on the table and what Tsipras can get through domestically. Equally, for long term gain, there is likely need for short to medium term pain on both sides of these negotiations.
Akos Valentinyi's picture Akos Valentinyi University of Manchester Neither agree nor disagree Very confident
The question is hard to answer. On the one hand, primary surplus has negative effect on demand relative to a primary deficit. Hence one may argue that the proposed agreement has a negative effect on Greek GDP. On the other hand the existing bailout agreement required a higher primary surplus than proposed agreement, and the Greek economy was growing last year under the old agreement. Hence one may argue that the proposed agreement requires smaller cuts in government expenditures than the old one. Therefore it will have a positive effect on Greek GDP relative to the exiting agreement.
Panicos Demetriades's picture Panicos Demetriades University of Leicester No opinion Extremely confident
Media reports are not terribly reliable in such fast changing circumstances. In any case, media reports suggest that there is as yet no agreement on new fiscal measures. It's therefore hard to comment on what the additional effects will be at this stage, without knowing the overall package of fiscal measures and structural reforms.
Richard Portes's picture Richard Portes London Business School and CEPR Strongly Agree Extremely confident
Tax increases, pension cuts in an environment of liquidity squeeze and highly oligopolistic product markets. Add huge uncertainty - this deal will be a short-run expedient. The recession that resumed at end-2014 and has carried into 2015H1 will intensify.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Strongly Agree Extremely confident
John Driffill's picture John Driffill Birkbeck College, University of London Disagree Confident
If the proposed tax increases are considered alone, all other things remaining unchanged, then yes, they will cause a fall in aggregate demand and GDP, at least for a while. But if they are taken in combination with the other parts of the package, unlocking the remaining bailout funds that can repay some IMF loans, allowing the ECB to continue to provide liquidity to the Greek banking system, as a prelude to debt write-downs in the future, and enabling less instability, then no, they will not cause a fall in demand, at least, not for long.

To default or not to default

Participant Answer Confidence level Comment
Wouter Den Haan's picture Wouter Den Haan London School of Economics Agree Not confident
Default is obviously a big step with negative consequences. However, the current Troika policies will push Greece into default anyway, so it could very well be better to get it over with.
Wendy Carlin's picture Wendy Carlin University College London Agree Not confident
It is difficult to answer confidently because it is not clear how the ECB would behave under such circumstances.
Gianluca Benigno's picture Gianluca Benigno London School of Economics Agree Confident
I think that at current debt to GDP ratio and given the economic situation, restructuring is the only way to go
Akos Valentinyi's picture Akos Valentinyi University of Manchester Strongly Disagree Very confident
Default is usually followed by a financial turmoil, and a loss of access by the government to borrow from the financial markets. A Greek sovereign default would have a more severe impact on the Greek banking system than in the case of another country which controls its own currency. A Greek default would render the banking system insolvent which would require of the ECB to cut its liquidity support as it can only lend to solvent banks. A sever Greek banking crisis is likely to follow a sovereign default which likely to have a further negative effect on Greek GDP.
Patrick Minford's picture Patrick Minford Cardiff Business School Strongly Agree Extremely confident
Greece should default now and leave the euro- not the EU, since for well-known foreign policy reasons this would be awkward for all. It should decide on its own policies; it is pointless for others to dictate policy to a sovereign nation and even counter-productive. Greece must learn in its own way. Yes, there will be some confusion and 'chaos' for a time; capital controls will be needed while a new currency is put in place. Then Greece will steadily begin to recover as devaluation triggers new export demand, business confidence returns, and national self-confidence too. Some contributions will be made to service existing foreign debts which will be redenominated in the new drachma. But the overhang of impossible debt will be removed; official creditors, the great bulk now, will have to explain to their electorates that they will not get a lot of their loans back but their electorates probably already knew this.
Tony Yates's picture Tony Yates University of Birmingham Disagree Not confident
No. Neither option is particularly attractive, but default has some very large downsides, including social collapse, exit from eurozone and even EU. I would guess that if Greece survives the non default option a favourable renegotiation could be had later, particularly if Greece gave ground on structural reforms.
Martin Ellison's picture Martin Ellison University of Oxford Disagree Confident
Andrew Mountford's picture Andrew Mountford Royal Holloway Disagree Not confident
What I know about Greece is what I read in the newspaper but from this it seems that Greece's problems fit neatly into our current theories of economic growth which ascribe a large role in the ultimate determinants of growth to the quality of institutions. Greece's institutions are reportedly very poor, e.g. http://www.ft.com/cms/s/0/6c55d1ba-980b-11e4-84d4-00144feabdc0.html , and so the current deal in which Greece agrees to raise funds for partial repayment in return for large infrastructure investment from the EU seems like a move in the right direction, providing of course these funds are monitored effectively and not misused . (http://www.spiegel.de/international/europe/eu-commission-president-juncker-on-greece-and-tsipras-a-1039738.html ) The funds are intended to be raised, in part at least, from a tax on the wealthy i.e from those who had benefitted from the previous poor governance which also seems efficient .( http://www.bbc.co.uk/news/world-europe-33228119 ) Indeed,as an economist, one of the baffling aspects of the recent financial crises is the seemingly great desire among policy makers to insure ex post those who made bad investments. If the market's incentive mechanisms are to work then those who lend to people/companies/football clubs /governments who have little chance of paying the money back, must lose money. In this respect the situation of Greece is not unlike that of the people of a developing country who, on successfully overthrowing an oppressive military regime, are weighed down by the debts built up by the previous regime for the military expenditures used to subjugate them. As has been noted before by prominent economists, the prospects for development and world growth will be improved if lenders know that such “odious debts “ would not need to be honoured by a new representative regime. ( see e.g http://www.brookings.edu/research/articles/2003/03/spring-development-kremer )
Luis Garicano's picture Luis Garicano London School of Economics Disagree Confident
Default is risky. The bail in of deposits required to recap the banks would be in the order of 25%, and Greece could end up exiting the Euro in a disorderly way.
Jan Eeckhout's picture Jan Eeckhout University College London Disagree Very confident
Michael McMahon's picture Michael McMahon University of Oxford Disagree Confident
While the adjustments under any creditor agreements will be hard, I believe that there will be an even larger short-term cost in Greece from a default, likely banking sector collapse and the adjustments while setting up a new currency where Greece to leave the euro.
Fabien Postel-Vinay's picture Fabien Postel-Vinay University College London Disagree Not confident
Given the amount of uncertainty about what would follow a Greek default, and given the possible repercussions on the Eurozone, I think trying to reach an agreement is the better idea for everyone. Defaulting won't terminate the difficult relationship between Greece and the Troika.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Disagree Not confident
An outright Greek default on the IMF might unleash an economic hurricane on Greece and is a very risky strategy.
Ray Barrell's picture Ray Barrell Brunel University London Disagree Very confident
Immediate default would be costly in the short to medium term. Unilateral action would not build goodwill in the political and financial communities. Default would probably mean exit from the Euro accompanied by a noticeable devaluation. The gains from devaluation are normally overstated, and they are often small and transitory. The damage to tourism from exiting the currency could be large, offsetting other gains. Outright default on this scale would probably exclude Greece from international capital markets for some years. Government deficits in the future would have to be covered by domestic residents, and new government debt would have to be held domestically. The situation might be distinctly uncomfortable, and protecting an actuarially unsound pension system that has been sustained by foreign borrowing would no longer be possible.
Sir Christopher Pissarides's picture Sir Christopher... London School of Economics Strongly Disagree Extremely confident
Defaulting right now would lead to some form of dual currency and possibly Grexit. It would spell disaster for the Greek people
Richard Dennis's picture Richard Dennis University of Glasgow Agree Not confident
Some form of default looks increasingly inevitable; if not on June 30, then uncertainty will continue as future repayment dates approach. It is unclear whether Prime Minister Tsipras has the political support needed to pass the proposal and it is unclear whether implementing the proposal would provide the Greek economy with enough foundation for recovery.
David Smith's picture David Smith Sunday Times Disagree Confident
A default now, which would make it difficult for Greece to maintain euro membership, would be negative for Greece. The deal on the table is not great but then this has been a badly handled negotiation, on both sides.
David Cobham's picture David Cobham Heriot Watt University Disagree Not confident
If default without Grexit were feasible, that might be okay, but it seems unlikely that Germany and others would be willing to allow that (for political rather than economic reasons). In that case default presages exit and a deeper and longer recession.
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research Strongly Disagree Confident
At a minimum I would have thought one would want capital controls in place first before defaulting. Since there is some way to go before the debt relief is known (if there is any), with capital controls in place I don't see why one would not hear the offer first.
Francesco Caselli's picture Francesco Caselli London School of Economics Strongly Agree Confident
It's very hard to predict what would happen if Greece defaulted on the IMF payment. The game of chicken may still be on, and Greece may still ultimately succeed in obtaining less insane terms for a new bailout. On the other hand the deal they are discussing seems certain to cause further increases in unemployment and poverty, so they should hold out.
Alan Sutherland's picture Alan Sutherland University of St. Andrews Disagree Not confident
Christopher Martin's picture Christopher Martin University of Bath Strongly Disagree Very confident
There are no good choices for Greece. Taking the deal implies continued miserable austerity and a difficult political environment that makes meaningful reform unlikely. But walking away looks much worse. Removal of ECB support from commercial banks will further undermine the flow of credit leading to further misery in the short-medium terms. Looking further ahead, I don't see much prospect of export-led growth or public sector-led growth outside the Euro
Paolo Surico's picture Paolo Surico London Business School Neither agree nor disagree Confident
It is hard to imagine how Greece could repay its debt (or even stabilize it in the short run) and, as the markets seem to be factoring in for a long time now, some form of default will be inevitable, with creditors 'forced' to write off a significant portion of the debt. So perhaps even more important of when Greece will default/restructure its debt (don't think the timing of that is that crucial) is the question on whether it will do this within the currency union or not.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Strongly Disagree Confident
I have not seen any credible plans as to how the Greek economy would be run in a post-default, post-Euro regime. And doubt that the current incumbents would be best placed to run the economy in such a circumstance.
Morten Ravn's picture Morten Ravn University College London Disagree Very confident
A default now could possibly bring about an even more severe recession due to the risk of a banking crisis. It is hard to see that this will be to Greece's advantage.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Agree Not confident
Much depends on whether default will lead to Grexit or not
Costas Milas's picture Costas Milas University of Liverpool Strongly Disagree Very confident
In the musical “The Sound of Music”, Maria repeatedly breaks the rules set by Mother Abbess (who runs the Nonnberg Abbey), and for this reason is asked to exit the monastery. For many Eurozone leaders, Greece represents a modern version of Maria who ruthlessly breaks the fiscal rules set by Angela Merkel (the modern version of Mother Abbess), and for this reason is threatened to exit the Eurozone monastery. This (I think) is precisely what will happen (sooner of later) if Greece defaults on its debts. Proponents of the default scenario both among European and Greek policy-makers argue that Greece, outside the Eurozone, will, sooner or later, boom. A Greek default followed by a “successful” Grexit largely rests on the implicit assumption that Greek government effectiveness is powerful enough to handle such a risky transition. Fans of the idea forget, however, that the continuous stand-off between Greece and its partners is explained (at least partly) by the very unwillingness of Greece to improve its government effectiveness by resisting necessary structural reforms. Indeed, had all structural reforms been implemented in the first instance, Greece wouldn't have been in the current mess.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Agree Confident
Unless the maturity date of Greek debt is rescheduled (in effect a default), and sustainable reforms are implemented which keeps capital markets open to Greece there is no viable alternative to default.
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme Disagree Not confident
Sushil Wadhwani's picture Sushil Wadhwani Wadhwani Asset Management Disagree Confident
if defaulting right now had led to capital controls followed by an uncertain period during which Grexit might have occurred,then i believe that it was better to sign the agreement. Moreover, i think that signing an agreement now makes it possible to have fruitful discussions about debt relief in the coming months.
Sean Holly's picture Sean Holly Cambridge University Agree Confident
Charles Nolan's picture Charles Nolan University of Glasgow Strongly Disagree Confident
Panicos Demetriades's picture Panicos Demetriades University of Leicester Strongly Disagree Extremely confident
A disorderly default will trigger a chain reaction of negative shocks that could prove truly catastrophic. If the ECB ceases to supply ELA to Greek banks, which would be almost inevitable in the event of default, the banking system will close down. Capital controls are not the answer, if there's no liquidity whatsoever. Shutting get down the banking system is like shutting down the entire economy. Cash will be king, those who have it will get by, those who don't would have no access to basic necessities, bread, milk, medicines, electricity. If this lasts for a few days, there will be blackouts and riots on the streets. What will happen next is highly uncertain, if there's still no agreement. This is clearly chartered territory. It may be necessary to issue IOUs to pay salaries and wages, that will start being traded allowing some domestic exchange. If there's still no agreement, Greece will be forced to introduce a new currency and may be forced out of the EU.
Richard Portes's picture Richard Portes London Business School and CEPR Disagree Confident
Default would be default on the institutions: IMF, ECB, ESM. The ECB would be unable to accept GGBs as collateral, and ELA would cease. The capital of the banks would be hit severely, because they hold large amounts of GGBs. Much of their 'Tier 1' capital is effectively fictitious, because it is 'deferred tax assets'. The banks would collapse. The government would try to impose controls to stop capital flight, but the Greek administration is unlikely to be able to enforce them effectively. Grexit would bring a sharp devaluation, with little expansionary effect through trade (Greece is a relatively closed economy) and devastating balance-sheet effects for firms with debts in euros.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Neither agree nor disagree Not confident
John Driffill's picture John Driffill Birkbeck College, University of London Disagree Not confident
Again it depends on the consequences of default, and the alternatives. Default wipes out existing Greek government debt, which is beneficial. But what then happens to access to borrowing in the future, to liquidity assistance from the ECB? If these disappear as a result of default, and if Greece then ends up introducing a new currency, the effects are likely to be a long period of dislocation and instability.

Will the creditors be better off?

Participant Answer Confidence level Comment
Wouter Den Haan's picture Wouter Den Haan London School of Economics Agree Confident
Default typically does not mean that the creditors will get nothing back. How much the creditors get back will depend mainly on the strength of the Greek economy. It is difficult to know what will happen if no agreement will be reached, but agreements that will hurt the Greek economy will negatively effect the amount of money the creditors can expect. In fact, it could very well be the case that the creditors end up doing better if Greece does a partial default now and stops pursuing bad economic policies. Even better for the creditors would be if there would be an agreement where debt forgiveness is coupled with long-term structural reform.
Gianluca Benigno's picture Gianluca Benigno London School of Economics Agree Confident
Akos Valentinyi's picture Akos Valentinyi University of Manchester Agree Very confident
Debt relief for Greece will happen sooner or later. One task for the creditors is to structure the details of bail-out the agreement and future debt relief in a way that gives the Greek government to carry out the reforms which are necessary for sustained GDP growth in medium to long run.
Patrick Minford's picture Patrick Minford Cardiff Business School Disagree Confident
In theory yes but in practice nothing has changed: Greece will pay back little if any of its debts and the new agreement if it happens will make no difference,
Tony Yates's picture Tony Yates University of Birmingham Disagree Not confident
Again there is the question of what the counterfactual is. Relative to default, surely more debt will be paid back. However, I doubt much of the debt will be paid back even in the 'no default' option. A no default deal will be followed by a restructuring and write down, and the NPV of the debt, which is already low, will fall further.
Martin Ellison's picture Martin Ellison University of Oxford Agree Not confident
Andrew Mountford's picture Andrew Mountford Royal Holloway No opinion Not confident at all
Relative to what? To default?!!! To the current unsustainable repayment schedule?!! I'm not sure what you mean here.
Jan Eeckhout's picture Jan Eeckhout University College London Agree Not confident
Michael McMahon's picture Michael McMahon University of Oxford Agree Confident
I do not think that now is the right time to push for tax increases in Greek though clearly dealing with Greek tax compliance is an important long-term reform for Greece. In addition to the economic costs (Q1), there are huge political costs to the Syriza party to signing up to the current agreement. As such they would need to be given a pretty significant debt reduction to take home to appease the electorate in Greece.
Fabien Postel-Vinay's picture Fabien Postel-Vinay University College London No opinion Not confident
Reaching an agreement seemed to be considered a prerequisite by some of Greece's creditors before any talks about debt relief could begin. Yet many consider that Greece is in urgent need of debt relief. Who knows what will happen now on that front?
Ray Barrell's picture Ray Barrell Brunel University London Strongly Agree Very confident
Debt repayments will fall. The agreement will almost certainly lengthen the period of debt to maturity, reducing repayments. There may also be some debt forgiveness. However, the larger the default component, the more costly will borrowing be for the Greeks in future.
Sir Christopher Pissarides's picture Sir Christopher... London School of Economics Disagree Confident
I believe it should lead to a decrease in debt repayments but I don't think Greece will be offered it on the basis of this agreement. If they sign another medium term (e.g., three year) rescue package they will be given it.
Richard Dennis's picture Richard Dennis University of Glasgow Agree Not confident
David Smith's picture David Smith Sunday Times Agree Not confident
Greece has already had significant concessions on debt repayments. This agreement may help at the margin, though probably not significantly.
David Cobham's picture David Cobham Heriot Watt University Disagree Not confident
Current terms as discussed in the media seem not to include any debt relief, but maybe it will follow later. However, debt relief is what Greece (and the Eurozone) need. And we economists need to mount a stronger challenge to the misguided economic policy thinking of the German establishment.
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research Strongly Disagree Very confident
Sadly I do not think that the current deal (such that we know) will be anything like enough to stabilise Greece's finances unless the economy can grow which seems highly unlikely with the likely NPLs in the banking system. I think the end game will be a referendum or fresh election which will decide the fate of Greece in the eurozone.
Francesco Caselli's picture Francesco Caselli London School of Economics Agree Not confident
This is a contractionary deal and it is reasonable to suppose that it will further reduce Greece's medium term capacaity for debt service, so, yes, it will proably rediuce even further the amount of money the creditors will get back.
Alan Sutherland's picture Alan Sutherland University of St. Andrews Neither agree nor disagree Confident
Christopher Martin's picture Christopher Martin University of Bath Strongly Agree Extremely confident
Greek debt repayments have to fall. Taking the deal just means this is more likely to occur through some sort of debt write-off than through default. The Greek economy urgently needs serious supply-side reforms. The Troika should have insisted on this and offered a halt to austerity in return. They didn't; but it is not too late to do so now.
Paolo Surico's picture Paolo Surico London Business School Neither agree nor disagree Confident
it is not obvious: to the extent the new interventions will be contractionary and given the forecast of output growth are lukewarm at best (especially relative to the high nominal interest rate paid on greek government bonds), it is not clear that he new plan will successfully stabilize the debt to gdp ratio. And to the extent that it does not, investors will keep asking a significant premium to hold Greek government bonds, suggesting that debt repayment may well not decrease in the near future.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Neither agree nor disagree Confident
Not sure I have seen the plans for any debt restructuring that would flow from this deal.
Morten Ravn's picture Morten Ravn University College London Neither agree nor disagree Not confident at all
I am not sure I understand the question.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Disagree Confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Disagree Confident
The aim of the tax rises is to persuade creditors to extend more credit rather than to pay off existing debt. This might provide a political fig-leaf for providing more short-term relief. But the economic basis for extending credit is a credible long-term fiscal policy.
Costas Milas's picture Costas Milas University of Liverpool Agree Confident
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme Agree Not confident
Sushil Wadhwani's picture Sushil Wadhwani Wadhwani Asset Management Agree Confident
yes-but this is primarily because i expect that signing the agreement allows the necessary discussions on future debt relief to occur.
Sean Holly's picture Sean Holly Cambridge University Neither agree nor disagree Confident
John VanReenen's picture John VanReenen London School of Economics Disagree Not confident
Greek debt needs to be restructured as it is unsustainable. But it also needs structural on pensions, tax collection, flexibility in labour and product markets, etc.
Charles Nolan's picture Charles Nolan University of Glasgow Agree Confident
I think any deal will require debt write downs of some description, otherwise there will be no deal.
Panicos Demetriades's picture Panicos Demetriades University of Leicester No opinion Extremely confident
Without knowing what the agreement is, it's hard to express an opinion on this.
Richard Portes's picture Richard Portes London Business School and CEPR Disagree Confident
Not at this stage. That might come in a third programme, but only if Greece has demonstrated with concrete measures that it is willing to do deep reforms.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Agree Not confident
John Driffill's picture John Driffill Birkbeck College, University of London Agree Confident
It seems likely the EU will consider debt reduction in the near future. Debt reduction may occur whether the current agreement is implemented or not, of course, either through default by Greece, or negotiated with creditors. It seems that some debt relief will need to happen anyway.