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Robert Johnson of INET says odious debt and the fear of a bank contagion that could ricochet across the world, keeps the financial sector from writing down the Greek debt

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SHARMINI PERIES, EXEC PRODUCER, TRNN: It is the Real News Network. I’m Sharmini Peries coming to you from Baltimore. Greece is on another deadline. Frustrated European leaders gave Greece until Sunday to table a proposal adhering to its terms after an emergency meeting of its leaders were held on Tuesday. But on Monday, the day after the Greek referendum which delivered a resounding no vote to European austerity plans, Paul Krugman of the New York Times likened the Troika’s demands to medieval doctors when he wrote, the truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients. And when their bleeding treatment made the patients sicker, demanded even more bleeding. Against all advice of many important economists, Europe and the Troika insist on drip-feeding Greece. Against this, a group of economists including Thomas Piketty and one of our own experts on the Euro crisis, Heiner Flassbeck, has penned an open letter to Angela Merkel, the chancellor of Germany, published in the Nation magazine. It makes a plea for debt forgiveness. They wrote: we cannot demand that generations must pay for decades of the mistakes of their parents. The Greeks have, without a doubt, made big mistakes. Until 2009 the government in Athens forged its books. But despite this, the younger generation of Greeks carries no more responsibility for the mistakes of its elders than the younger generations of Germans did in the 1950s and ’60s. We need to look ahead. Europe was founded on debt forgiveness and investment in the future, not on the idea of endless penance. We need to remember this, they wrote. Now joining me to discuss the measure of debt forgiveness is Rob Johnson. Rob Johnson serves as the executive director of the Institute for New Economic Thinking, INET. And he’s a senior fellow and director of the Global Finance Project for the Franklin and Eleanor Roosevelt Institute in New York. Rob, thank you for joining us. ROB JOHNSON, DIRECTOR OF ECONOMIC POLICY INITIATIVE, ROOSEVELT INSTITUTE: My pleasure. PERIES: So there’s tremendous social media attention being paid to the letter that was sent by Thomas Piketty and a number of other leading economists, and I was wondering what your response and reaction to that is. JOHNSON: Well, I think the underlying episode drives a lot of the attention of the media, although Thomas Piketty has done tremendous work in what you might say, waking up the world to the level and increases in inequality that we’re facing all over the world. He’s, he’s a very fine scholar, and I think that he and some of the others now are shedding a light on essentially what the Greek people said in the referendum. You can make us a little worse or whatever, but you’re not going to drag us down as indentured slaves. We need to feel hope about our future, or this system isn’t coherent and we may have to bear the brunt of leaving just to get to a place where we can restore hope and re-exercise our sovereignty. And I think his work reinforces the perspective of Hollande’s government in France. Some of the other prime ministers would like to see this long prolonged austere period come to an end, and put Europe back into a place where particularly its young people can get out from under 50 percent or 40 percent youth unemployment and start to feel like they have a future to build again. PERIES: Rob, this is not the first time that economists such as Piketty or Jeffrey Sachs or even Heiner Flassbeck, someone we interview regularly, has sent letters supporting the reduction on perhaps even a big haircut to Greece. Yet there hasn’t been a lot of attention paid to this advice. Why do you think so? JOHNSON: Because of the strength of the financial sector in power politics. That’s not true just within the Eurozone, it’s true all over the world. There are some reasons why that strength is quite odious, related to just money and politics like you see in the United States. There are other dimensions which, what you might say, we have a regulatory financial system that got way out of control, and everybody’s afraid to have Greece default or restructure their debt for fear of how it will propagate like a contagion through the system, and affect everybody, not just within Greece or not just a couple of banks that have lent to them, but that it will ricochet through the financial system and cause a downturn. And particularly with regard to the so-called credit default swaps. People don’t tend to have faith that they know how many of them are out there or where they’re distributed. Certainly internal authorities will reassure you, say, at the ECB, the European Central Bank, that they do. But there’s not transparent information of these holdings that we can all get at and size up who’s safe and who’s not safe. In that context there are a whole lot of people that are afraid to make what you might call real adjustments and therefore lighten the burden on the population of, say, Greece, the debtor country, and put more burden on the shoulders of the creditors who made mistakes in lending to them. PERIES: Rob, the really crux of this entire Greek crisis is that they are being drip-fed for years now in terms of sort of a carrot and stick kind of an approach that obviously Piketty and others are saying is not–is not working for Greece. What other options are there, and can you also talk about the IMF’s role in all of this? Because just prior to the referendum on Sunday, the IMF did try to throw a more resolve option on the table for Greece, but no one actually chewed that up. JOHNSON: Well, the well-known journalist Paul Blustein wrote a paper for the Center for International Governance Innovation in Waterloo, Canada where he described how in the earlier periods, around 2010, the IMF tried to get people to write down the debt but the ECB and the European Union, afraid of that bank contagion I mentioned a moment ago, stopped it. And as a result they extended more credit, which many people thought was setting good money after bad. And the IMF, on the cusp of this referendum, came up and said, this isn’t sustainable unless there is substantial writedown. And what you call the drip system was really a combination of the power politics in the financial sector not giving–Greek reforms are so profound and so substantial that they would just sink into a perpetual depression if they tried to undertake them in what you might call shock treatment. And so we were in a stalemate and we were limping. We were coping and hoping something would change tomorrow for what turns out to be about five years. PERIES: Now, so the European Union has given Greece another deadline that’s looming on Sunday. Your thoughts on what will happen on Sunday. JOHNSON: Well, I think where we are right now is that that same creditor energy that I talked about is very strong. There’s some people would like to push Greece out, make an example of them, show how much they can hurt them. There are others who would very much like to conserve the system, because they see that this austerity regime, if it [what] should call sacrifices the Greeks, will end up dealing with Spain, with Portugal, with Italy in exactly the same way, and people will be heightened in their anxiety when those larger countries come to the brink, particularly in Spain, I think, that somehow people will not know how to do anything but play tough. So I think right now, Greece has to put forward a credible program. I believe it’s on Thursday. They announced their attention to today in a letter that was put out this morning. They will put forward a plan. But they will–and they alluded to it in their letter this morning. They will be looking for how to make the debt sustainable. Now, the interest on the debt, interest rate, is very low. And with long maturities and stretch outs, and so forth. I don’t think this is out of the realm of possibility. But the Germans and the other creditor nations have to decide they want Greece in the system for the integrity and the coherence of the system, where some of them seem very attracted–probably because of their fear of losing power within, say, Germany, that if the leaders don’t act tough their own voters will become angry with them. PERIES: Rob, now, this pressure they’re going to feel in terms of leaving the European currency doesn’t mean that they have to leave the European community. After all, you have situations like the UK that uses their own currency, the pound and not the Euro. Could you not anticipate a situation like that for Greece? JOHNSON: Well, I, I can imagine that being an endgame, though there will be a lot of acrimony and blaming back and forth. Who caused this, the Greeks didn’t make the structural reform, the ECB cut them off and pushed them over the cliff, the intractability of the creditor nations or the Eurozone as a whole in terms of providing proper adjustment. Everybody’s going to point fingers at everybody else. And so it will take a bit of time to repair, how would I say, after the ERM dissolution, the British never opted back in. so they can maintain that status without a lot of acrimony. A negative change, which looks like a failure of the system, will leave scar tissue that will take some time to heal. PERIES: And finally, Rob, you’re experience of working in the UK, and you’re known as the man who broke the Bank of England–. JOHNSON: I think George Soros is known as that man. I was just one of his guys. PERIES: Hence what you think is the prospects for Greece in the near future? JOHNSON: I think right now it’s 60-40 in favor of Greece leaving. They would have to put on capital controls, recapitalize their banking system, set up a domestic parallel currency. A large devaluation will, because the country is very dependent upon imports of basic goods, will further impoverish the population for a time. And they don’t export a great deal. So the–I think the path of adjustment will be very long. The question is whether the Syriza government can’t sustain the enthusiasm of the population going their own way. One of the things that I think economists are very, very faulted for is in believing that what I’ll call small beer material calculus is driving the whole show. I think there’s an uprising right now where people feel and are involved in a transcendent task of throwing off the chains of an oppressive regime that they endured for five years with no light at the end of the tunnel. I suspect the Greek people may rally together if they leave the system, endure a lot of pain. But the price of that pain is regaining a future for their children. And, and that’s what I expect. I think they will bear that pain much better than economists doing material balance calculus would suggest. PERIES: Rob Johnson, I want to thank you so much for joining us and enlightening all of us and our audience here at the Real News. JOHNSON: My pleasure. PERIES: And thank you for joining us on the Real News Network.


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Rob Johnson is President of the Institute for New Economic Thinking. He was previously Director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute and is a regular contributor to the Institute's blog NewDeal 2.0. He serves on the UN Commission of Experts on Finance and International Monetary Reform.

Dr. Johnson was also a Managing Director at Soros Fund Management where he managed a global currency, bond and equity portfolio specializing in emerging markets. He was also a Managing Director at the Bankers Trust Company. Dr. Johnson has served as Chief Economist of the US Senate Banking Committee under the leadership of Chairman William Proxmire and was Senior Economist of the US Senate Budget Committee under the leadership of Chairman Pete Domenici. Dr. Johnson was an Executive Producer of Taxi to the Dark Side, an Oscar Winning documentary produced and directed by Alex Gibney.