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For
a moment, it looked as if the Greek government's capitulation, together
with its newly humble attitude (helped by a change of personnel in the finance ministry), would enable the Eurozone creditors not only to agree a new bailout program but also ...
German Finance Minister Wants Greece Out Of Euro
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After
a bruising few days, the Greek government has come up with a new
proposal. Helped by the French, who appear to have decided that under no
circumstances should Greece be forced out of the Euro, they have
produced a detailed document that includes commitments to reform of pensions and taxation. The distinction between this and the European Commission’s unofficial proposal of June 26th
is vanishingly small: longer timeframes for elimination of the EKAS
supplementary pension and ending of VAT subsidies for the islands makes
this proposal a little less like a cliff edge, but as far as I can see
that’s about the only difference. Faced with a stark choice between
crossing its “red lines” or being forced out of the Euro, the Greek
government has caved in.
Initial responses to the new proposal were positive. The IMF , ECB and European Commission said the proposal was a good basis for talks. The “Euro working group” that initially examined the proposal gave the green light for it to go to the Eurogroup for consideration. For a moment, it looked as if the Greek government’s capitulation, together with its newly humble attitude (helped by a change of personnel in the finance ministry), would enable the Eurozone creditors not only to agree a new bailout program but also, perhaps, to offer debt relief.
The Greek government’s proposal, far from ending austerity, actually increases it (though over a longer time frame than the creditors wanted). So debt relief has now become the principal aim of the Greek government. In his speech to the Greek Parliament, the Greek Finance Minister Euclid Tsakalotos described various forms of debt restructuring that he said would now be agreed, including a swap of ECB-held bonds for ESM bonds that was originally proposed six months ago by Yanis Varoufakis. Mr. Tsakalotos’s conviction that debt relief would be offered in return for the new, tough proposal undoubtedly helped to persuade the Greek Parliament to vote for the proposal, which was duly passed with only 17 votes against. But several members of Syriza either abstained or voted against it, including a couple of ministers: the proposal only passed with the support of opposition parties. A reshuffle of the Greek government now seems likely.
In switching from ending austerity to obtaining debt relief the Greek
government does seem now to be pushing at a half-open door. There is
strong international support for debt relief: the IMF, the US, France
and Italy have all said that debt relief is necessary. And there is a
sense that capitulation cannot be entirely on the Greek side. Donald
Tusk, president of the European Council commented
that “a credible proposal from Greece must be matched by a credible
proposal from the creditors”. The Greeks have offered austerity. The
creditors must now offer debt relief.
To be sure, debt relief does not necessarily mean a face value write-down. It might mean extension of maturities and interest amnesties that would mean Greece could effectively ignore its debt for many years to come, perhaps only commencing repayments when growth is restored. This certainly seems to be what the IMF had in mind in its Debt Sustainability Analysis:
Initial responses to the new proposal were positive. The IMF , ECB and European Commission said the proposal was a good basis for talks. The “Euro working group” that initially examined the proposal gave the green light for it to go to the Eurogroup for consideration. For a moment, it looked as if the Greek government’s capitulation, together with its newly humble attitude (helped by a change of personnel in the finance ministry), would enable the Eurozone creditors not only to agree a new bailout program but also, perhaps, to offer debt relief.
The Greek government’s proposal, far from ending austerity, actually increases it (though over a longer time frame than the creditors wanted). So debt relief has now become the principal aim of the Greek government. In his speech to the Greek Parliament, the Greek Finance Minister Euclid Tsakalotos described various forms of debt restructuring that he said would now be agreed, including a swap of ECB-held bonds for ESM bonds that was originally proposed six months ago by Yanis Varoufakis. Mr. Tsakalotos’s conviction that debt relief would be offered in return for the new, tough proposal undoubtedly helped to persuade the Greek Parliament to vote for the proposal, which was duly passed with only 17 votes against. But several members of Syriza either abstained or voted against it, including a couple of ministers: the proposal only passed with the support of opposition parties. A reshuffle of the Greek government now seems likely.
Greek Finance Minister Euclid Tsakalotos
takes part in a meeting of the Eurogroup finance ministers in Brussels
on July 11, 2015. German Finance Minister Wolfgang Schaeuble said that
last-ditch talks with Greece on a new debt rescue needed to keep it in
the eurozone will be ‘extremely difficult.’ (JOHN MACDOUGALL/AFP/Getty
Images)
To be sure, debt relief does not necessarily mean a face value write-down. It might mean extension of maturities and interest amnesties that would mean Greece could effectively ignore its debt for many years to come, perhaps only commencing repayments when growth is restored. This certainly seems to be what the IMF had in mind in its Debt Sustainability Analysis:
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Given the fragile debt dynamics, further concessions are necessary to restore debt sustainability. As an illustration, one option for recovering sustainability would be to extend the grace period to 20 years and the amortization period to 40 years on existing EU loans and to provide new official sector loans to cover financing needs falling due on similar terms at least through 2018…..In this scenario, while the November 2012 debt/GDP targets would not be achievable, the gross financing needs would average 10 percent of GDP during 2015-2045, the level targeted at the time of the last review.But hardline finance ministers are having none of it. Slovakia’s Peter Kazimir, Austria’s Hans-Joerg Schelling and Germany’s Wolfgang Schaeuble all rejected debt relief outright. Herr Schaueble even said that debt relief could break the “no bailout” requirement in EU treaty legislation.
I find this extraordinary. A bailout is the granting of loans, not the subsequent restructuring of those loans. The no-bailout clause was breached in 2010, 2011 and again in 2012 for Greece, not only through lending by the EFSF but also through bilateral loans, the largest of which came from Germany. When the European banking system was at risk, the no-bailout clause was an inconvenience that could quietly be ignored. But now the banks are believed to be secure, the no-bailout clause can apparently be invoked with impunity to deny debt relief that everyone knows is not only needed by Greece but also by the rest of the Eurozone. Without it, the creditors stand to lose their shirts. I fail to understand why 100% loss through default and disorderly Grexit is better than an agreed restructuring that may mean no loss at all, just a very long wait. But that’s Eurozone politics for you.
But it’s not just debt relief that the hardliners want to reject. It is the whole proposal. The fatal flaw in the Franco-Grecian plan is that there is no agreed benchmark for a “good enough” proposal. So hardliners who really want Grexit can refuse to accept not only this proposal but any other on the grounds of inadequacy. Nothing the Greek government proposes is ever going to be good enough for those who are determined to see Greece leave the Eurozone. Unless clear criteria can be established for acceptance of the Greek proposals, the hardliners can simply drive Greece out of the Euro through a process of attrition.
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