June 17, 2015
In these days we are seeing creditors and Greece playing their role in some kind of plot. They both target an agreement on debt restructuring, but they first need to distract the audience.
In the event of a Grexit, the Greek government would simply default on its debt. In this scenario, other European countries are expected to suffer huge losses with more than 200 billion euros to be written down. The cost for Greece would be mostly economic and political isolation.
Grexit can be avoided with an agreement on debt restructuring. If the Greek government were offered such a proposal, Tsipras and Varoufakis might be much more willing to accept the reforms that creditors insistently ask for. More important, the Greek government needs the support of the Syriza’s hardliners, who are more and more inclined to choose the Grexit alternative. Debt-relief might be the carrot Tsipras can use to get their support.
Let’s also not forget that Varoufakis is in principle contrary to getting more bailout cash to fix liquidity issues. He is right and he is not the only one claiming that. Strange enough, the IMF is another supporter of the obvious need of some kind of debt-relief. Pouring more money into Greece’s coffers to postpone the inevitable debt restructuring only has a short-term benefit for German and other European politicians that do not want to take responsibility for the unavoidable event: European taxpayers will suffer considerable losses. The best option for Angela Merkel is to postpone the painful decision after the end of her mandate, when someone else will be responsible for the loss of taxpayer money.
Compare the first with the second scenario (Grexit vs “controlled default”). The advantage of the “debt restructuring proposal” is that it will be much more likely for European countries to get back part of their money. The only reason why Greece is still willing to pay back the debt is because the country wants to remain in the Eurozone and not to damage the relationship with European partners.
What will happen? We are seeing a theatrical play in these days. Both parts want to reach an agreement on debt restructuring but it is not straightforward. Germany and other creditors need to create a situation in which they appear to be forced into such an agreement. On that side, the blame has to fall on Greece. On the other side, the Greek government needs to appear bold and fighting for the dignity of the country. Tsipras wants a situation in which he can claim some results to be offered to Syriza’s hardliners. Only in this way he will be able to get their support for painful measures he will be forced to accept afterwards.
As an Italian, I am used to the least honorable political acts being made in August, when people are on holidays. The same will happen with the Greek debt dispute. The unpopular agreement will be reached in the middle of the holiday season, possibly in the most obscure and less transparent way (as stretching the debt duration to the infinite future). Let’s keep reading the news from the seaside.