The Greek government’s opening move was to risk default by refusing further bailouts and demanding an immediate deal on debt relief. This was almost certainly a negotiating and tactical manoeuvre. I don’t think the Syriza Government’s priority is to reduce the total debt burden right now (although it will try to do that later), and although it does want to end the dependency on further financing packages from the Troika it does not intend to go quite as cold turkey as it is making out.
Lets reprise the situation that Greece is in, and the role of the European part of the Troika in it’s predicament.
Greece went bust in 2009. It was bankrupt. There was no way it could possibly pay it’s debts which were owed to banks in the form of Greek government bonds that the banks were holding. As these bonds became due for repayment the Greek government would be unable to repay them and as result they would become worthless and as a result lots of banks would have become insolvent and gone bust.
As the scale of financial shortfall that the Greek government was facing became apparent the inevitable happened which was that the cost of Greece securing new loans in the market place shot through the roof. The amount of interest that the markets demanded in order to take on new Greek government bonds became impossibly high and Greece could not raise money to pay for it’s activities or pay it’s debts. Greece was bust.
Normally what would have happened at this point was that the Greek government would have gone to the IMF for an emergency loan package. A default would have been declared on the existing Greek debt and once the dust had settled lots of banks would have made a loss and quite a few, in the harsh financial conditions following the crash of 2008, would have gone bust. Greece would have implemented an emergency program to reduce it’s public spending and bring the budget back into balance. It would have also devalued it’s currency making it’s exports cheaper and imports more expensive and this would have boosted the Greek economy. It would have been painful but it would have been episodic. By now Greece would probably be recovering.
But Greece did not default in the ‘normal’ way because Greece was now in the Eurozone and this meant it it could not devalue it’s currency and that it’s default would be managed by a cumbersome collection of European institutions such as the European Commission, the European Central Bank and various Eurozone government from the larger economies, as well as the IMF. All these institutions came together in what was known as the Troika and they set the terms for the way Greece would manage it’s bankruptcy, and the way it would be made to manage it was designed to protect the the integrity of the Eurozone but in doing so it condemned the Greek people to a protracted and self perpetuating economic slump.
The key to the strategy of the Troika, a strategy set by it’s European members and reluctantly followed by the IMF, was to refuse to accept that Greece had gone bankrupt. Declaring a bankruptcy, or a default as it is usually termed when nations go bust, would have meant accepting that banks would incur large losses. The European members of the Troika did not want this because it feared triggering both an extended collapse of the very fragile European banking system and contagion because a Greek default would have pushed up the costs of borrowing by other Eurozone members triggering further defaults and this would bring down the poorly designed Eurozone in a disorderly collapse.
So the European members of the Troika socialised the Greek debt by paying off most of the private sector with public money thus turning private debt into public debt. Greece now owed a vast debt to various bits of the EU (members states, the ECB, etc).
Because of the acute sensitivity of being seen to transfer funding to Greece (something nobody in Germany would countenance), and because it was seen as vitally important to not establish a precedent for future transfers of resources to other regions, the European members of the Troika insisted that the money they had paid to the banks had to be repaid by Greece. In order make this possible the Greek government were instructed to take all measures necessary in order to generate a budget surplus. The Greeks were expected to start repaying the loans more or less immediately and so they were expected to start generating a budget surplus immediately. In order to ensure the Greek government complied a permanent apparatus of the Troika was to be established within the Greek state in order to monitor and instruct where necessary in the process of shrinking spending and driving up tax receipts. It’s this permanent apparatus of the Trioka in Athens that Syriza is refusing to talk to anymore, as far as they concerned that game is over.
The predictable results of such a massive deflationary hit during a global recession was that the Greek economy began to shrink rapidly. As it shrank it’s debt burden grew proportionally larger and the task of generating enough of a surplus to start making repayments became ever harder. As the economy shrank the Troika made new loans to roll over expiring loans but they kept exerting intense pressure on the Greeks to do the very things that made growth in Greece, and a social and economic recovery, impossible.
The Syriza term for this system of economic purgatory is ‘Pretend and Extend’. The ‘Pretend’ refers to the pretence that Greece did not go bankrupt and that all debts can and will be repaid. The ‘Extend’ refers to the fact that because Greece cannot do the impossible the whole absurd and destructive program of economic deflation, ’interim’ refinancing and Troika supervised deflation is constantly extended and the Greek economy is prevented from ever recovering. It’s this pointless and cruel process that Syriza wants to break with.
Greek debt has ballooned to 175% of GDP – a level which could force the IMF to reconsider any further lending. Under its own rules, the IMF is not allowed to lend unless the debt is sustainable.
But the actual cost of debt service for Greece is well below market rates, and much of it does not have to be repaid for a very long time. Greece also benefits from a concession that means it does not have to make principal repayments on European Financial Stability Facility (EFSF) loans until 2022. Greece’s debt service costs do not appear unaffordable, at an estimated 2.6% of GDP. On the face of it, therefore, Greece’s debt should be sustainable. Indeed, other highly-indebted Eurozone countries could rightly feel aggrieved if Greece receives further debt relief. So what is the justification for writing down Greece’s debt?
The real problem is not Greece’s debt. It is the Eurozone’s bailout conditions, as Phillipe Legrain explains in the FT in response to a letter by Hugo Dixon:
“Syriza now wants to negotiate a haircut of the loans from eurozone governments. Mr Dixon argues that this would bring little immediate relief because the (nominal) interest rates on the loans are low and no principal is due until 2022. But he ignores the costs of requiring Greece to run a huge primary surplus of 4.5 per cent of GDP from next year on and the strictures of the EU fiscal compact, which requires governments with debts of more than 60 per cent of GDP to reduce the excess by one twentieth a year — a tall order with debts of more than 175 per cent of GDP.”
What is really needed is a less restrictive bailout conditions, an acceptance that trying to run a budgetary surplus at the bottom of deflationary hole is insane and a relaxation of the fiscal compact rules so Greece is not forced into trying to reduce it’s total debt burden immediately. Greece needs room to breathe and to grow it’s economy.
You cannot revive anyone by standing on their neck.
The Greek government’s opening move was to risk default by refusing further bailouts and demanding debt relief. This was a tactical manoeuvre. The Finance Minister’s refusal to accept any more bailout money got the world’s attention, whereas a simple request for easier terms would have barely raised an eyebrow, and would therefore have been easily rebuffed by the Troika. Threatening to default is the only card Greece and the Syriza government have to play. The are saying ‘change the rules or we won’t play’
This is a game of brinkmanship and manoeuvre and the first brink is the position of the Greek banking system. The European Central Bank has warned that if the Greek government failed to secure a deal by the end of February, the ECB would pull the plug on funding for Greek banks precipitating a general collapse of the Greek banking system. Such a collapse would trigger the disorderly ejection of Greece from the Eurozone with unknown consequences.
Greece can only stay in the Eurozone if the European Central Bank (ECB) continues to provide liquidity to the Greek banking system. Syriza insists that the Greeks want to stay in. But ECB liquidity will only be provided under two possible scenarios. Either that the Troika folds and agrees to the easing of the conditions forcing the Greeks to constantly deflate their economy (i.e. a removal of the target to of generating a surplus next year and beginning repayments). Or that Syriza negotiates with the Troika and agrees that the current contract must be upheld.
Somebody is going to blink otherwise the European Central Bank will be in the extraordinary position of having to deliberately crash part of the European banking system. Yanis Varoufakis, the new Greek finance minister is, among other things, an internationally renowned game theory expert and this is the biggest game in town at the moment. His frantic shuttle diplomacy around Europe is intended to communicate a clear message that the Syriza government wants to negotiate in good faith, that the old arrangements for Greece are dead, and that what Greece is asking for (an end to the sort of automated austerity that has depressed the entire continent) is something that is both reasonable and good for the whole of Europe.
Grexit would be an unmitigated disaster not just for Greece, but for the whole Eurozone. And Varoufakis knows this perfectly well. Threatening to default is a powerful strategic move to which the Troika has so far found no satisfactory response. Withdrawing liquidity from Greek banks would simply precipitate a disorderly unwinding of the Euro. The ECB can no more follow through on this threat than it could when it threatened to do the same to the Irish banks in 2010. But Varoufakis is not Enda Kenny. The ECB may well find its bluff called this time.
BREAKING NEWS: Just seen a report that both the ECB and the IMF are considering leaving the Troika. Looks like the logjam is breaking.
