The Gordian knot: debt relief

Yesterday Finance Minister Varoufakis listed in six points why Greece should vote “No” in the referendum on Sunday. In the first four of the points he mentioned debt relief as part of a possible deal. Although the IMF itself, through its Chief Economist, also suggested that debt relief is crucial, otherwise Greece will not become sustainable until 2030, it is equally clear that debt relief is not on offer and has not been part of the negotiations.

The importance of the issue was again underlined by Varoufakis this morning, when he said that he will rather cut off his arm than to sign an agreement which does not include debt relief.

But debt relief is not included. It is opposed by the Germans. The same Germans, who, after they caused huge devastations in Europe during WW2, had themselves been granted debt relief, do now think it is not appropriate for Greece. Greece, whose only “crime” is to have borrowed too much in the decade following introduction of the Euro, should now pay all the money back. That over-indebtedness, together with other countries of the European periphery, caused an economic hick-up in Europe, but, unlike WW2, no deaths. Well, almost no deaths, the rise in suicides in Greece itself, following the hope-zapping and cruel austerity policies imposed by European “partners” on the Greek people is devastating and shocking.

The insistence and the continuous blinkered view by the Germans that only Greece is to blame for the crisis, will hinder progress. Germany has to accept that regulatory failure within the Eurozone also caused the crisis. The EU and Germany will have to accept it was also their fault. If they do not, the impasse will remain.

Germany says it does not want to encourage others, such as Spain or Portugal to apply for debt relief. But Greece is considerably worse off than its southern Eurozone neighbours or Ireland, and it should therefore be granted special consideration. These charts show the difference both in adjustments and in pain which Greece has suffered compared to the less affected neighbours.

Yesterday I said that the Greek crisis was mainly caused by a failure of the European Central Bank to ensure financial stability within Europe. Greek budget deficits, and just as importantly, its current account deficits, went crazy in the early 2000s up to the crisis in 2010. And, of course, the EU did not have sufficiently robust mechanisms in place to ensure that member states adhere to its own Maastricht criteria which limited government debt to 60% of GDP and budget deficits to 3% and which were conditions for being admitted to the single currency.

So mainly by over-borrowing first, and then by shrinking its GDP to adjust, we now have Greek debt at 180% of GDP, three times the Maastricht criteria. Three times! If the EU said that 60% was sustainable for Eurozone members when it designed the Euro, it must surely now concede that three times that level is unsustainable!

Let us also look at the Greek budget deficit, which is, at 3.5%  in 2014, finally now within a whisker of where it should have been all along. The last time it was at that level was in 1999. But following admission to the Eurozone, the budget deficit of Greece got continually worse between 1999 and 2010 from just over 3% to 15% – and no action was taken until the crisis unfolded in 2009/2010. It is obvious that Greece would not be in the difficulties it has now, if it had paid back its high government debt by running smaller deficits. There would not have been the excessive debt problem we have now. Or, in other words, where was the Troika when we needed it, in 2002?

So it is obvious that this is a failure of the regulator, to ensure its Maastricht criteria, and financial stability within the Eurozone. And therefore the regulators should pay. Cutting the Greek public debt to EU and IMF creditors in half, from 240bn to 120bn would ensure that the future of Greece is assured and viable. Its debt/GDP ratio would fall from 180% to 110%. That would still be bad enough for a country which has not seen any growth for the last 5 years. But it would be the first sign of hope and a real sign of the much cited solidarity within the Eurozone. That is the solidarity that the German chancellor Merkel loves to talk about, but which has so far not cost them anything in cash terms. If Germans are serious, they have to get their wallets out.  Solidarity is not just enforcing austerity on others – it is time to pay up.

Europe, therefore, by conceding a 120bn debt write-off for Greece, would pay for its failure to regulate the new currency of the Euro as it should have done when it introduced it. It seems a fair compromise. That is the price it has to pay. The cost of the single currency, free until now, is therefore 120bn for all Eurozone  countries, in addition to the austerity of the countries which had to adjust. That is not too high a price to pay. About Euro 350 per citizen of the Eurozone, added to the government debt of their own countries, and off the balance sheet of Greece. It might seem like an expensive lesson. But equally it could be a bargain, if we now have learned from our mistakes.

The alternative is, of course, the Grexit. A Grexit would quadruple the cost of this 120bn write off, were Greece to introduce a new currency and then devalue it, making its old Euro denominated debts unpayable. And leaving all Greek creditors shouldering the losses of Euro 320bn Greek government debt and 120bn in Target2 liabilities to the ECB. The biggest insolvency in history and a nightmare scenario! Debt relief at a quarter of the price sounds even more of a bargain now.

So it looks that even after a likely NO vote in the referendum on Sunday, the issue of debt relief will continue. And Germany will still be as intransigent in its attitude to debt relief.

Therefore, frankly, there is not much point continuing negotiations for the Greeks about austerity if they will not get what they want regarding debt relief. Why continue – just to be able to have support for the banking system through ELA?

Despite of Varoufakis’ spin on things, that capital controls will be eliminated on Tuesday after the vote, as soon as a deal is done, is very unlikely to be the case, now they have been introduced. First, of course, there will not be a deal on Tuesday. Then, given the remaining huge uncertainties in Greece, money would flood out of the country again. Capital controls have to be amended, so that payments for imports could be made, but they cannot be fully abolished for the time being. That means that ELA does not need to be increased, as money from capital flight does not flow abroad. So there is no need to come to an agreement with the creditors, purely to keep the ECB sweet.

After a NO vote, the Greek government should not sign any agreement which would include only further austerity and no debt relief. There is no point in doing that, why cause further pain for no gain? (Or the uncertain and limited gain of possible extension of ELA limits, which are independently controlled by the ECB Council?)

There seems to remain only one option. Ultimately, if Greece wants debt relief, it will have to do it unilaterally, by not paying its creditors. So far, it has done just that, left the IMF out in the cold, as it was not able to pay the 1.6bn repayment due on 30th June.

Greece should continue with that policy of selective default on its public debt to EU or IMF partners, and obtain debt relief by stealth, rather than by agreement. No point negotiating further – it will not get anywhere. Greece needs stability and concentrate on its own problems, like how to ensure that its people get back to work.

It is time to end the negotiations, as no country can be governed by continuously going to the circus which is called European Union. Especially if all what is on offer there is to negotiate austerity programmes and memorandum of understanding which hand sovereignty to unelected officials of IMF and ECB. Enough of that – enough of even talking to them.

Greece has a primary surplus, does not need further funds from the EU, can obtain debt relief through selective default, and should walk away.


3 thoughts on “The Gordian knot: debt relief

  1. I agree – selective default is the path I have envisaged for quite some time. The mainstream press keeps on talking of this resulting in Greece being ‘kicked out of the €’, but there is no provision within the treaties – as I understand it – to carry out this threat.

    That said, the actual interest payments on Greek debt are not that high as a percentage of government spending – the 2012 restructuring plan spread out payments and lowered the interest rates due. The real issue is austerity – it amuses me that figures on Greek pensions are always given as a %age of GDP. If you go back to 2010, spending levels were in line with the € zone average. It is only because the economy has experienced a massive contraction that the pensions spending has reached 17/18% of GDP.

    The real question is how to enact international laws on debt that enable creditors and debtors to resolve issues much faster and without resorting to punishing the weak for the mistakes made by their so-called betters.


    • I agree too.
      But I have an even better suggestion.

      You call this the “radical economic thought”.
      So, let’s be radical.

      The money that was lent did not vanish into thin air and it is a unanimous knowledge that Greece is one of the most corrupt countries in the world. A lot of the people that stole this money have bought big villas and houses in UK, Germany, and Switzerland as well as transferred the money they should have paid their taxes with also into bank accounts in these same countries.

      And here the radical idea:

      Make a law in which it is allowed to the creditors to seize these assets and in return give those good and proud Greek people there share of the Greek bonds.
      Because I am sure those good and proud Greek people are just waiting to help their poor but also proud brothers and sisters but just don’t know how.
      I am also sure that there will not be much left of the debt to the rest of the euro states to even bother to talk about.

      Now that’s radical not all the BS being talked about.

      And everybody can be proud.
      I think that is the word Alexis and Yanis have been using all the time?


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