July 3, 2015

Greek debt is unsustainable. The entirely predictable results of refusing to countenance debt restructuring back in 2010 when the crisis erupted and the IMF were first involved, and then the woefully inadequate partial and begrudging partial debt restructuring in 2012, has been economic collapse in Greece.

The continuing crisis has not been because the Greeks have been slow to ‘reform’ their state and finances, neither is it because the reforms have been inadequate. The Greek state budget Budget is more or less balanced. Greeks don’t need more bail outs because they cannot finance their own state, the additional funding is not even to pay off existing debt, they need funding to just pay their interest on their debts. That is an unsustainable debt suituation.

The key problem, and its been the same problem for five years, has been the refusal by the Troika to accept that Greece went bankrupt. Instead the pretence has been that the Greek problem was one of illiquidity, they were just short of money, so more loans and more debt was the answer. More debt is not the answer, debt restructuring is what is needed.

Since the referendum was called things have begun to shift. The IMF has released an assessment, which I wrote about in the previous post, which accepts that the Greek debt burden is unsustainable. Now Latvia’s outgoing President Andris Berzins has said in an interview with Latvian Independent TV that “this [Greek] debt is so big that everyone understands that it won’t be repaid.” This quite a shift as Latvia was taking quite a hard line on the Greek crisis. This may be the very first time that a Eurozone leader has actually told the truth about the debt crisis, in recent history. Granted, it does miss one key element of what has gone on, namely that most of the Greek bad debt has been shifted from European private banks to the European taxpayer, but that’s a story for another day.

Berzins had some further observations that were likewise amazingly frank, adding that “loans to Greece have just bought time so that those in power don’t have to take decisions. This is like a game: who can hold out longer by not showing that this money has been lost? This burden has become bigger and there obviously is no possibility to repay.”

He concluded that the “debt write down of Greek debt will come after bankruptcy of state.”

Also overnight Wikileaks has released an intercepted NSA communication between German Chancellor Angela Merkel and her personal assistant that reveals that not only Merkel, but Schauble, were well aware that even with a debt haircut (which took place in 2012 but only for private creditors and whose impact was promptly countered with the debt from the second bailout) Greek debt would be unsustainable. Technically, she did not use that word: she said that “Athens would be unable to overcome its problems even with an additional haircut, since it would not be able to handle the remaining debt.”

The cable notes that even “Finance Minister Wolfgang Schaeuble alone continued to strongly back another haircut, despite Merkel’s efforts to rein him in… with IMF Managing Director Christine Lagarde described as undecided on the issue.” Fast forward to today and now Lagarde is decided, and the IMF admits a 30% Greek haircut is necessary. So why is Syriza being portrayed as irresponsible for insisting that debt restructuring (accepted by Germany in 2011 and the IMF now) is actually put on the table as part of the current package rather than just extending the existing program, with no debt restructuring, which means yet another crisis a few months down the road? One possible explanation is that there are those, and Wolfgang Schaeuble I am looking at you, that actually want the Greeks out of the Euro. Another is that the fear of political contagion, should Syriza be seen to gain anything from its confrontational anti-austerity position, is so intense that the eurozone leaders are willing to see Greece forced out of the euro rather than for Syriza to appear to have succeeded.

Paul Mason from Channel Four has posted an interesting short video interview with Varoufakis [Updated to a longer version of the Interview] in which the Greek Finance minister says that since the referendum was announced they have already received better offers which they would accept but that the referendum must go ahead.

The way forward could be clear if the Troika officially came out accepted debt restructuring in principal, accepted the previous program had produced catastrophically poor results and began to work in partnership with the Greek government for a strategic solution.

There are plenty of precedents for such a course. Sovereign debts have been restructured hundreds, perhaps thousands, of times – including for Germany. In fact, hardline demands by the country’s US government creditors after World War I contributed to deep financial instability in Germany and other parts of Europe, and indirectly to the rise of the Nazis. After World War II, however, Germany was the recipient of vastly wiser concessions by the US government, culminating in consensual debt relief in 1953, an action that greatly benefitted Germany and the world. Yet Germany has failed to learn the lessons of its own history.

The first step must be a victory for the ’No’ vote in the referendum.

Second, Greece should continue to withhold service on its external debts to official creditors in advance of a consensual debt restructuring later this year. Given its great depression, Greece should use its savings to pay pensioners, provide food relief, make crucial infrastructure repairs, and direct liquidity toward the banking system. The ECB should start acting like a real central bank, turn ELA back on and allow the Greek banks to reopen.

Given a ’No’ vote the government should make it clear to all Greeks that their euro deposits are safe; that the country will remain within the eurozone (despite the false claims by some members of the Eurogroup that a no vote means a Greek exit); and that its banks will reopen immediately after the referendum.

Finally, Greece and Germany need to come to a rapprochement soon after the referendum and agree to a package of economic reforms and debt relief. No country, including Greece, should expect to be offered debt relief on a silver platter, relief must be earned and justified by real reforms that restore growth, to the benefit of both debtor and creditor.
An agreed reform package was nearly in place and if accompanied by a formal acceptance of debt restructuring the two sides can begin to work together again. Syriza is strongly ideologically committed to deep reforms in Greece, let them get on with it.

A corpse cannot carry out reforms. That is why debt relief and reforms must be offered together, not reforms “first” with some vague promises that debt relief will come in some unspecified amount at some unspecified time in the future (as some in Europe have said to Greece). Both sides have made countless mistakes, misjudgments, and misdeeds over the last decade, and even before. A country does not reach Greece’s parlous state without a generation of truly terrible mismanagement. But nor does a country go bankrupt without serious mistakes by its creditors – first in lending too much money, and then in demanding excessive repayments to the point of the debtor’s collapse. With both sides at fault, it is important for them not to lose the future by squabbling endlessly over the past.

Easing Greece’s debt burden while keeping the country within the eurozone is the correct and achievable path out of the crisis, and it can be accomplished easily through a mutual accord between Germany and Greece, to which the rest of Europe will subscribe. The result would be a win not only for those countries, but also for the world economy.

Personally I just want this thing over so I can think and write about something else.

I am just tired of the cant, the hypocrisy, the sheer doublethink duckspeak of the Troika. The likes of Christine Lagarde, who pays no tax whatsoever on her $465,000 salary, urging the Greeks to pay their taxes. Enough!

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