It is still less than two weeks since the left-wing, anti-austerity Syriza party took power in Greece’s general election. Their election promise was to end austerity and halve the nation’s debt burden through a debt write-off. In power, Syriza have taken a more conciliatory tone with EU partners, insisting that Greece will honour her debts and is seeking to work together with all stakeholders to put Greece’s debt on a viable basis.
Reaction to the outcome of the Greek vote in European capitals has been cordial, as one would expect, but leaders have reiterated that Greece must honour her obligations and respect EU rules. So the question is: how will Greece square the circle? It seems that Greece is proposing to swap debt for bonds which will only pay a yield when the fortunes of the Greek economy allow it. In essence, this would be a debt write-off by any other name and is akin to a tenant telling a landlord that the rent will only be paid when their boss gives them a large bonus. In all probability, it is likely to be received just as well.
The Irish, Portuguese, Spanish and Cypriot citizens have all been forced to accept EU/IMF bailouts in the aftermath of the Global Financial Crisis. Whilst these nations would no doubt jump at the type of deal that Greece is seeking, they are all trying to honour the terms of the bailout that they received, reform their economies and make the scheduled repayments. Given the amount of support that Greece has already received and the debt write-offs that creditors were forced to accept as a condition of the second bailout, it is politically unacceptable to grant Greece what it is seeking. Any indication that Greece has found a “shortcut to Go” on the Euro Monopoly board would encourage similar parties in other nations to demand equitable treatment (which would be hugely popular with the electorate) when polls are held in other European states.
Syriza has indicated that it will not negotiate with the Troika over release of the final tranche of bailout payment due imminently and worth €7.2 billion. It has also made some moves to roll back some austerity measures which were required as a condition of the bailout. Even with the final payment, Greece was expected to need a further €10 billion in the first quarter of 2015 to be able to meet its obligations. At the moment, how the Greeks intend to honour their obligations, in the absence of the write-down they seek, is far from clear.
The ECB has been forced to decline to accept Greek government bonds as collateral for loaning money to Greek commercial banks – which did allow such banks to borrow from the ECB at 0.05%. The move comes into effect on 11th February. The ECB was forced to take the decision since it could not be sure that Greece would be able to make a deal respecting its existing obligations over the IMF/EU bailouts (totalling €240 billion).
The Greeks make the point that they are unlikely to be able to repay their debts, but the same could be said of Japanese, British or American public debt – however, none of these other nations are suggesting that they should stop servicing debt obligations which they freely entered into.