Why Asia's sympathy for Greek debt crisis only extends so far

Lee Jong-Wha says Asia's harsh experience of an IMF-led rescue during its 1997 crisis stands in sharp contrast to the generous treatment being given to Greece today. Yet, the region was able to recover much more strongly

PUBLISHED : Saturday, 18 July, 2015, 9:30am
UPDATED : Saturday, 18 July, 2015, 9:30am

Asian countries have been watching the Greek crisis unfold with a mixture of envy and schadenfreude. When they experienced their own financial crisis in 1997, they received far less aid, with far harsher conditions. But they also recovered much more strongly, suggesting that ever-growing bailouts may not be the best prescription for recovery.

Since the onset of the crisis, Greece has received massive financing from the so-called "troika": the European Commission, the European Central Bank and the International Monetary Fund. It received bailout packages in 2010 and 2012 totalling €240 billion (HK$2 trillion). The latest deal promises up to €86 billion on top.

By contrast, South Korea's 1997 bailout package - which was larger than those received by Indonesia, Thailand or the Philippines - totalled US$57 billion. At the time, South Korea's annual gross domestic product was US$560 billion; in 2014, Greek GDP amounted to less than US$240 billion.

The IMF seems to have lent Greece such a large amount for political reasons. Major IMF shareholders, the European Union, and the US have a vital interest in stabilising Greece to safeguard French and German banks and preserve Nato unity.

To be sure, the economic mess created in Greece - the result of government profligacy, official corruption and widespread tax evasion - merited some international assistance. And the IMF did impose conditions on its loans to Greece, most of which were necessary to address the country's insolvency. The requirements of the latest rescue deal are the toughest yet.

But the scale of the aid remains massive, especially when one considers how little progress Greece has made in implementing the reforms it promised in the past. This contrasts sharply with Asia's experience in 1997.

Unlike Greece, Asia's problem was not an insolvency crisis, but a liquidity crisis, caused by a sudden reversal of capital flows. Though substantial short-term debts in the financial system and corporate sector did amplify the shocks, the primary factors fuelling the crisis were the lack of international liquidity, panicked behaviour by investors and financial contagion.

Yet the IMF imposed even tougher conditions on Asia than it has on Greece, including fiscal austerity, monetary tightening, and financial restructuring. Some of these were clearly unnecessary, as evidenced by Malaysia, which recovered quickly from the crisis without IMF aid.

In any case, the actions were temporary. Once confidence began to recover, the East Asian economies shifted their monetary and fiscal policies towards expansion and embraced large-scale exchange-rate depreciation - efforts that enhanced their export competitiveness. Structural reforms, including the immediate closing of financial institutions and the elimination of non-performing loans, also helped to bolster recovery.

In South Korea, for example, real GDP growth quickly rebounded. By mid-2003, some 776 of its financial institutions were closed. And the authorities' strong commitment to reform restored investor confidence, reviving inflows of private capital and reactivating foreign trade.

Greece, by contrast, has utterly failed to engineer a recovery. Instead of dropping to 110 per cent as planned, the public debt-to-GDP ratio has increased to 170 per cent. Unemployment stands at 26 per cent, and hovers around 50 per cent among young people.

Against this background, it was not shocking that Greece, unable to come up with €1.5 billion at the end of June, became the first developed country to miss a payment to the IMF. Belatedly, the fund acknowledged that its lending and policy advice had failed in Greece.

Greece's government then demanded more financial support with less stringent conditions. But, as its creditors have now recognised, providing more money will not address Greece's insolvency. That is why the new deal requires that the government immediately cut pensions, raise taxes, liberalise the labour market and adhere to severe spending constraints. At the same time, a write-down of official debt, like the "haircut" given to private creditors in 2012, will be necessary.

Many have questioned whether agonising reforms are entirely necessary; if the country returned to the drachma, they suggest, it could implement interest rate cuts and devalue its exchange rate, thereby engineering an export-led recovery. But, given Greece's small export sector, not to mention the weakness of the global economy, such a recovery may be impossible. Greece's best bet is reform.

So far, Greece has shown itself to be unwilling to implement a painful internal-wage adjustment and reform measures forced by outsiders. Perhaps the latest deal will be a turning point. Otherwise, Greece's exit from the euro zone seems all but inevitable.

Asians watch with sympathy the fall from grace of the birthplace of Western civilisation. But perhaps Greece should look to Asia for proof that, by taking responsibility for its own destiny, a country can emerge stronger from even the most difficult trials.

Lee Jong-Wha is professor of economics and director of the Asiatic Research Institute at Korea University. Copyright: Project Syndicate