The Greek Debt Crisis: Shaping a Compromise

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by Molly Shutt

alexis-tsiprasThe ongoing negotiations between the Greek government and international creditors looking to reach a deal on the terms for bailout funds have been tense, accusatory and largely inconclusive. With the next official meeting of Eurozone finance ministers on April 24th, Athens has attempted to placate creditors to secure a third bailout and gain access to €7.2 billion of withheld bailout funds. As a member of the Eurozone, Greece has the safety net of European and other international funds with a vested interest in helping it avoid default and restructure its debt. However, the government cannot deliver on both of Greek citizens’ conflicted interests of remaining in the Eurozone and obtaining unreasonably lenient terms for the bailout. While concessions can also be made on the creditors’ side, the Greek government must up its efforts to tighten its financial belt.

Background

The global financial crisis of 2008 revealed fundamental issues with Greece’s economy, with which the country continues to grapple today. Rampant tax evasion, political corruption and public spending dug Greece into a hole of debt that the government must now face head-on. With the first bailout of €110 billion in 2010, the Greek government implemented contingent austerity measures despite public protests and a trade union strike; following a second bailout in 2012 of €130 billion from the EU, the government passed another round of austerity policies, despite increasingly violent protests. These bailout packages placed the majority of Greek debt, a staggering €315 billion, into the hands of European governments, the European Central Bank (ECB) and the IMF. Then, in January, the leftist political party Syriza won the general election, with Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis dismantling a number of previously agreed upon spending cuts and strongly opposed to further austerity. The particularly aggressive exchanges between Varoufakis and German Finance Minister Wolfgang Schäuble reflect the high stakes of Greece’s economic future.

Give and Take

On February 9th, Tsipras agreed to several compromises, as summarized by The Economist:

First, Greece would keep ‘70%’ of previously agreed reforms; those ditched would be replaced by ten new measures agreed with the OECD, rather than the despised ‘troika’ of the ECB, the IMF and European Commission. Second, it would reduce its primary (ie, excluding interest payments) budget surplus to 1.5% of GDP, from a target of 3% this year and 4.5% in 2016. Third, it would swap much of its existing debt for two exotic types of bond: a ‘perpetual’, meaning that the principal would never be repaid, and a ‘GDP-linked’ bond, with payments tied to the health of Greece’s economy. Finally, the government would spend an extra €1.9 billion on ‘humanitarian assistance’ for struggling Greeks.

Last month, the Greek government submitted a new list of reforms, focused on raising revenue through taxes and combatting corruption. Reforms committed to include €3 billion raised through new tax revenue, measures to fight tax evasion, €1.5 billion from the privatization of the Piraeus Port Authority and increased alcohol and tobacco taxes. However, creditors seek the reform the pension system and labor markets, as well as more privatization. Specifically, Eurozone creditors and the IMF prefer deeper cuts to pensions to minimize government subsidies, further changes to labor market regulations to bring the power of collective bargaining down to the standards of other European countries, and the continued sale of state-owned assets.

The Situation

Greece is running out of cash after repaying a 1.4 billion euro loan installment to the IMF on top of pensions and government wages last month. Even though Greece made a 450 million euro payment to the IMF on April 9th, it could run out of money by as early as May. The Syriza government is dragging out the process by defying the bailout conditions of the troika to satisfy domestic demands while insisting that the goal is to keep Greece in the Eurozone. Public disdain for negotiations with the troika has the government turning east, toward China and Russia for investment and mutual support. Tsipras signaled this intention by pushing up his visit to Moscow by more than a month, publicly denouncing EU sanctions against Russia, and expressing interest in Russia’s plans to construct a new gas pipeline through the Black Sea to Turkey. The geopolitical implications of a democratic and historically Western ally strengthening its ties to Moscow in the face of Russian aggression in Ukraine would be significant.

Greece frames the situation as a matter of restoring dignity; Germany and other creditors view the situation as a matter of taking responsibility for one’s actions. Despite some German calls for Greece’s departure from the Eurozone, if Greece were to leave it could mean the unraveling of confidence in the common currency area and the broader European Union, and Greece would be no better off. Specifically, Spain, Italy and possibly other members could follow suit, and some economists estimate that the Greek economy would shrink by 10 percent in the first year. The reinstated currency would drop by over 50 percent against the euro, leaving businesses unable to pay large bills denominated in euros, and Greece might lose incentives to follow through with necessary political and economic reforms.

Thus, the necessary steps forward require some lenience from Greek lenders and a large dose of humility and acceptance from Greek officials and citizens. Specifically, fellow EU members can extend payment periods for loans, reduce interest rates further, and grant Greece access to €1.9 billion from an earlier ECB bond-buying program as goodwill gestures of community. As for Greece, Tsipras and Varoufakis must accept the hardships of doing what is ultimately best for the country and less politically damaging for themselves, rather than what the far left of Syriza thinks is fair. Greek pensions in particular are far more extravagant than those in other EU states and must be reeled in.

Molly Shutt is a transatlantic economy analyst at the Streit Council. Photo credit: European Parliament

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