Greek Default?

Jack Rasmus

In the past week, Greece and the coalition of the Eurozone’s Troika of Eurozone finance ministers, the IMF, and the European Central Bank (ECB) have both hardened their positions as negotiations grow increasingly acrimonious over the future of Greek debt payments.

The extension of the Greek debt negotiations, which was agreed onFebruary 28, is due to expire June 30. If no new agreement, or further extension, is agreed to by the end of June, a default by Greece on its debt is likely. Default is simply a legal term meaning failure to make timely payments on interest and principal due on a debt.

Earlier this month, Greece postponed a payment that was due to the IMF. However, according to IMF’s own rules, Greece was able to do so since Greece offered to combine the early June payment with another payment due at the end of June. Since announcing that postponement, the positions have hardened, with ultimatum-like public declarations forthcoming by both sides. Last minute arranged meetings in Brussels and elsewhere have produced little change.

On the one side, the Troika continues to demand that Greece adhere to the terms and conditions of the old agreement, signed in 2012 in its latest version, and then extended on February 28 until June 30. The Troika insists that Greece create a budget surplus of at least 3 percent, from which Greece will make debt payments to the Troika – the IMF, ECB and the bail out funds of the European Commission which together hold most of Greece’s approximately US$300 billion debt. With Greece’s economy mired in depression for more than six years, and now again weakening, generating a 3 percent surplus requires massive spending cuts and tax hikes – i.e. a continuation of ‘austerity’ that will all but ensure the Greek depression will continue for years to come.

On the other side, the Greek government, led by its majority Syriza party, has proposed an 0.8 percent annual budget surplus from which to make debt payments. It insists the 2.7 percent budget difference must be used to stimulate the economy, to boost investment, create jobs, and restore income, in order to generate taxes from which to pay down the debt. Greece proposes, in other words, a plan to grow its way out of the debt; whereas the Troika wants its money now, taken from the incomes of workers, retirees, taxpayers and local Greek businesses.

The Troika and the northern European press and media like to paint Greece as being unreasonable. But nowhere in the mainstream European media is the Troika’s ‘pound of flesh’ proposals and demands portrayed as unreasonable; nor is Greece’s ‘grow out of the debt’ solution portrayed as reasonable.

As the Troika continues to insist that Greece adhere to the old agreement terms, the Troika itself simultaneously refuses to abide by the old terms itself. Since last August 2014 it has refused to release the additional loans to Greece it was required under the same old agreement to provide, withholding more than US$8 billion. It also refuses to forward to Greece the interest earned on Greek bonds held by the ECB that was also required under the old and extended agreement. Meanwhile, the ECB continues to provide Greek banks with the bare minimum of loans under the Eurozone’s banking rules – i.e. just enough to keep Greek banks on a short leash and an economic eyelash from collapsing in the current situation. So the Troika continues to squeeze Greece and its government, to force them to agree to continue the current agreement while it, the Troika, violates that very same agreement. While negotiations continue, Greece must pay up, while the Troika does not. And nowhere in the northern European media is that described as unreasonable either.

Over the past week the Troika tightened the screws even further. Since any new agreement after June 30, whatever its content, will require a vote of the German and other Parliaments, the Troika’s representatives in negotiations want some kind of deal immediately, in order to have time to vote before June 30. Or so they say. But June 30 in reality is no real deadline, and could be easily extended by the parties if the Troika wanted. However, it appears increasingly that the Troika does not want to do so.

In an act designed to increase the pressure on Greece, the IMF representatives walked out of negotiations last June 10 and suspended negotiations, citing there were major differences and no progress was being made. Even though the IMF holds only US$23 billion of Greece’s more than US$300 billion debt, it has led the hardliners – along with Germany—in demanding a continuation of harsh austerity measures for Greece as part of Greece’s debt agreement terms. Other Troika leaders chimed in, showing a united front of opposition with the IMF to any changes in the debt payments. European Commission President, Jean-Claude Juncker, described last week’s negotiations prior to the IMF walkout as “a last attempt to make a deal possible.” Donald Tusk, the European Council president added his hardline take, saying “the day is coming, I’m afraid, where someone says the game is over. There’s no more time for gambling.”

The Troika’s recent abrupt shift to a much harder line seems to have emerged from the G7 meeting in Bavaria over the weekend of June 6-7. At that meeting, US president Barack Obama reportedly agreed with the hardliners, giving them a green light. The Troika’s stiff response and proposals that immediately followed the G7 meeting were met by a Greek equally adamant response on June 8. The Troika proposed that Greece retract pensions that were restored after February 28 and impose even more stringent labor market reforms in Greece. That reportedly incensed both the Syriza left wing as well as moderate members of the Greek parliament. With rising opposition to the Troika’s latest proposals within both his party and government by mid-week, Greek president, Tsipras, then met with European Commission president, Juncker, on June 10. But with positions of both sides hardening, the most recent face to face discussions between Tsipras and Juncker went nowhere. The IMF thereafter walked out on June 11, and the flood of Troika accusations and the media attack on Greece quickly followed.

The key strategic question at the moment is why is the Troika hardening its line and position, with a deadline for the extension expiring in less than two weeks? Why did it propose an apparently ‘no changes, take it or leave it’ to Greece on June 7 following the G7 meeting. It surely must have known that response would incite anger and more opposition within Greece’s parliament? So why the abrupt harder line and ‘take it or leave it’ proposals?

First, it is obvious that Greece cannot repay the more than US$300 billion in debt it owes the Troika, either by means of agreeing to more austerity or even by ‘growing’ out of the debt – neither of which is going to happen soon. Greece’s debt is reportedly about 180 percent of its annual GDP. That amount of debt can only be restructured, i.e. reduced and expunged at least in part. It is too large to pay down by diverting spending – i.e. austerity. And too large as well to grow out of it. But northern European politics stand in the way of any form of debt restructuring at the moment, especially in Germany. So some kind of crisis must be allowed to happen first, in order to put pressure on both German and Greek public opinion and parliamentarians to seriously consider debt restructuring.

Up until the G7 meeting, the Troika wanted a ‘Plan A’. That plan was to get Greece to agree to simply extending the old terms of agreement for some unspecified further period. The Troika would then release the US$8 billion it held in arrears, from which it would in effect pay itself the US$8 billion in Greek payments due between June 30 and August. Clearly the Troika has been holding those loans back, in order to eventually pay itself with them. But what the Troika really wants in Plan A are its proposed, even more stringent ‘labor market reforms’ implemented in Greece. Those labor market reforms include laying off the government workers the Syriza government rehired after it was elected, reversing the moderate pension restoration Syriza introduced, suspend raising the minimum wage in Greece, implement all previously planned privatizations, and introduce changes to union collective bargaining agreements and right to strike.

These labor market reforms are just as much at the heart of the differences between the Troika and the Syriza government as is how much surplus should be created (0.8 percent vs. 3 percent) going forward. The reason why the Troika wants labor market reforms is that, should the Troika let Greece off the hook on the reforms, then the precedent will be set for weakening similar reforms Eurozone bankers and politicians are desperately trying to get passed in France and Italy.

The Eurozone economic recovery strategy is based on boosting exports. To boost exports, costs of production must be reduced. The ECB’s recent QE monetary policy is designed to drive down the value of the Euro currency. That reduces costs from currency devaluation and makes Eurozone exports more competitive. But ‘internal devaluation’ does the same. Internal devaluation is about holding down or reducing prices of goods for export by lowering production costs, especially wage costs. That has been done already in Spain, which appears to be the new model for Euro exports and recovery. Spain introduced stringent labor market reforms several years ago, made its goods more competitive, and boosted exports. That did little for Spanish workers’ wages, or for job creation in Spain which is still at depression levels. But Spanish GDP has risen modestly. The Troika and the Eurozone economic elite want to extend labor market reforms elsewhere. To let Greece ‘off the hook’ jeopardizes that Eurozone-wide strategy, and puts all the pressure on boosting exports on the ability of the ECB, the central bank, to engineer exports growth by means of QE-driven currency devaluation. Internal devaluation and QE-currency devaluation thus go hand in hand.

It is important to note that Syriza and the Greek government have made concessions already in the direction of agreeing to some labor market reforms since February 28. But those concessions have been met by Troika demands for more of the same, without any counter-concessions by the Troika in return. In an article that appeared in the French newspaper, Le Monde, in early June, Greek president, Tsipras, publicly indicated that his government had already accepted a number of privatizations, and had repealed some early pension retirement benefits and raised the pension retirement age. Tsipras also indicated Greece was committed to introduce labor market reforms that were outlined by the International Labor Office in Geneva. The Troika accepted that, and then continued to demand even more, while making no concessions in response that would have kept the negotiations on a productive track. Instead, once Tsipras’ Le Monde article appeared publicly, the Troika’s door slammed shut just after the G7 meeting a few days later.

All of which leads one to suspect the Troika has shifted to a Plan B. That Plan B is most likely to force a default crisis, to push Greece to the edge of default, or perhaps into default itself. So why might the Troika prefer Plan B is the key question?

First, Plan A does not appear politically possible at this point, either in Greece or Germany. Second, default may in fact represent what the Germans want. Greece’s debt is unsustainable. Greece cannot repay it with more austerity. Seven years of depression is the limit and the Greek people are in rebellion against the Troika program. It is equally apparent that Greece can not ‘grow out of’ the debt, notwithstanding Syriza’s proposals to do so. Just do the numbers, as they say. With debt nearly twice the size of Greece’s annual GDP, it would take decades of continuous 3% GDP growth to pay off the debt. And given the state of the global economy, and Europe’s even worse economy, there’s no way 3% growth will continue for decades, or even for the next several years for that matter. It just won’t happen. So, if Greece can’t repay and if it can’t grow out of it, and if German politics won’t provide any more debt or allow a restructuring of the current debt that includes forgiving part of that debt—then the only option that remains is to let a crisis happen. In other words, let it go to default.

A default for the Troika is actually attractive in some ways. First, with its recent authority to inject US$1.2 trillion in QE, the ECB has sufficient funds to bail out northern Europe banks and bondholders who may be negatively impacted by a default. In the meantime, the Troika has the US$8 billion to make payments to itself for another 60-90 days, so no default impact on government bonds. In the interim period, default might allow the debt restructuring that political forces in Greece and Germany today now oppose.

From the Troika’s perspective, a default would also reduce the value of the Euro. And that’s not all bad in the view of European export-oriented corporations. The ECB’s QE policy has lowered the Euro currency’s value some, with some modest boost to exports. But not enough. A default would reduce the value of the Euro further and theoretically provide another boost to exports and the sagging Eurozone economy.

A default would have serious short term economic effects within Greece. Capital flight from Greece would intensify in the event of a default. Capital controls would have to be imposed. The Syriza government would most likely have to call an election, and that may be precisely what the Troika wants as well. With only a majority of 12 in the Greek Parliament, the Syriza government might just lose political control in the Parliament. A new government might prove more amenable to Troika demands, especially if a Troika engineered even deeper economic crisis in Greece is successfully blamed on Syriza and Tsipras by a Euro-wide public media barrage aimed at Syriza. No doubt the Troika’s big business supporters still within Greece would assist.

So the Troika’s Plan B now unfolding may just be to precipitate a default. To shake up the economic and the political landscape in Greece and elsewhere. To shift perceptions and positions, and perhaps even the players themselves.

What we have seen in recent months and weeks is a classic capitalist bargaining strategy. If capitalists or their managers don’t like the other party’s negotiators, they undermine their reputation within their own team. The tactic is to make them appear incompetent and then go around them and have them replaced. That was done several weeks ago by the Troika with regard to Greece’s finance minister, Varoufakis, who was then partially sidelined. The Troika hoped Tsipras would prove more pliable and amenable. But the Syriza party rank and file rose up lasts week and injected itself into the negotiations. Tsipras then resisted making more concessions when the Troika made none in return. How could he, without signaling willingness to completely collapse his demands?

Having succeeded once in sidelining Varoufakis, the Troika strategy now is apparently to create a further crisis in order to replace Tsipras himself and dislodge Syriza from a majority position in the Greek parliament by forcing Greece to call new elections. If that succeeds, it just may get the Troika a more pliable negotiating partner later this summer. In the meantime, a default crisis lowers expectations on both sides and makes compromise later this summer more possible than at present. In the meantime, the US$8 billion funds are used to pay bonds due and the ECB stands by with its US$1.2 trillion QE fund to calm the markets. In short, Plan B looks more attractive than Plan A which has reached a dead end.

To summarize, the Greek debt crisis cannot be resolved by either more austerity or by growing out of it. The Troika is perhaps realizing this. The debt must be restructured, but that is impossible politically without a deeper crisis. So the Troika may have decided to provoke one. In the process it may shake up the chessboard, as they say, and result in an easier bargaining opponent and a more ‘reasonable’ public – both in Germany and in Greece – that agrees to some kind of debt restructuring. That may be Plan B about to unfold in the next two weeks. If so, it will become more apparent when the Eurozone ministers meet again onThursday, June 18. Watch closely.