The recent victory of the leftist party Syriza and the defiant attitude of its Government towards its lenders (EU, BCI and IMF, the so called troika) has thrust Greece into the headlines once again. Here we look at the numbers (from Eurostat, 2013), the problems and the negotiation alternatives of both sides – the Greek government and the troika.
The new Greek government wants a haircut for its immense public debt: 319 billion or 175% of GDP. For comparison, the public debt of Spain, another peripheral country with problems, is 966, or 92% of GDP. Syriza claims that its debt will never be paid back. And it is right . In order to the pay down the debt you need to have a fiscal surplus, and the Greek government hasn’t had that for 35 years. In this regard it is similar to most (or all) OECD governments that have never had a fiscal surplus. Those that have barely had 2 or 3 years of a small fiscal surplus in the last 35 years.
The problem for Syriza is not the debt but the annual government deficit: 22 billion, or 12% of GDP in 2013 . This deficit is financed year after year by the troika. If the troika stops this financing now, the Greek government will not be able to pay salaries, pensions etc. next month .“The new Greek government wants a haircut for its immense public debt: 319 billion or 175% of GDP. Syriza claims that its debt will never be paid back. And it is right. In order to the pay down the debt you need to have a fiscal surplus, and the Greek government hasn’t had that for 35 years”
Syriza claims that the public debt burden is too heavy and prevents fiscal surplus. This is not true. The troika gave favorable debt terms and right now the average interest rate on public Greek debt is 2.3% (Spain has 3.5%), well below the 10%-11% paid in the markets. Interest payments represent 7% of total public expenditure, in line with what other governments spend (in Spain 8%).
The problem for Syriza is not the load of the 7 billion spent on interest, but the other 100 billion of public expenditure or 58% of GDP (Spain has 44% in line with most EU members). There are many reasons for such high public expenditure. One such reason is likely the fact that in Greece there is 1 public employee for every 3 private employees (in Spain and most of the EU that proportion is 1 to 6). On top of that, during the boom years (2002-08), public expenditure increased by 47 billion (67%). During the crisis (2008-13), it was only reduced by 11 billion (2% reduction per year). This imbalance has been financed by the troika.
Unfortunately for Syriza, a default of the Greek Government is not a big deal. Greece’s public debt is not that much compared with the financial power of the EU, the ECB and the IMF combined. After all Greece makes up less than 2% of the EU GDP. In fact the only economic consequence of a default would be that the EU would not need to pour more money every year into the Greek Gov. The consequences would have been totally different five years ago in 2010 (when the first rescue plan took place). At that time, a default by the Greek Government could have caused serious trouble, if not a collapse, of German and French banks (main holders of Greek debt, public and private) and in turn this would likely have collapsed the entire European financial system. Now, however, the circumstances are different because all the debt is held by the troika and it is strong enough to survive.
“Unfortunately for Syriza, a default of the Greek Government is not a big deal. Greece’s public debt is not that much compared with the financial power of the EU, the ECB and the IMF combined. After all Greece makes up less than 2% of the EU GDP. The consequences would have been totally different five years ago in 2010. I wonder if Syriza is aware of this different scenario, because it certainly changes its power to negotiate”
In 2010 the EU was very afraid of the risk of contagion affecting other peripheral countries (Spain, Italy, Portugal and in other ways Ireland), as the risk premium crisis of 2012 showed. Now in 2015, this is not a risk. Individual countries have made improvements, and most importantly, the ECB has put all the artillery in place to circumvent risks such as the Quantitative Easing approved just days before the Greek elections.
So, with a fortified Europe the scenario in 2015 is far removed from what it was in 2010. A Grexit (Greece leaving the euro) would not be (in my opinion) a huge deal. I wonder if Syriza is aware of this different scenario, because it certainly changes its power to negotiate.
The main risk facing the EU now is political with the emergence of extremist anti-European parties . If the EU yields to Syriza’s demands, the message for the European population would be crystal clear: don’t follow the rules, protest hard and you will be heard. Many Syrizas could gain power in several European countries – not what EU leaders want. By yielding to Syriza, the EU has too much to lose and too little to gain. The Wall Street Journal summarized it quite brilliantly: “sacrifice Greece to save Spain” .Last but not least. Most of the attention has focused on the problem of debt and refinancing. But that is not the immediate problem. If the Government defaults, it will have no money (or it will have less money than it needs), and this will destroy the public sector which will be a tremendous blow to the Greek economy, but not an immediate one and certainly not a fatal one. The critical problem is when not only the public sector, but also families and companies have no money. This will happen if the Greek banks don’t have money because deposits are taken out and the ECB stops lending to them. In this case corporations would have no lines of credit, which are absolutely necessary to run a business; families will not be able to use credit cards (because there will be no credit), they will not even have enough money to consume because there will be no money in the bank. In this case the entire economy will collapse and very quickly. The financial system is to the economy what the blood system is to the human body. Three minutes without blood means death, 3 months without money means death to the entire economy and much pain and despair to the people.
“If the Government defaults, it will have no money (or it will have less money than it needs), and this will destroy the public sector which will be a tremendous blow to the Greek economy, but not an immediate one and certainly not a fatal one. The critical problem is when not only the public sector, but also families and companies have no money”
Unfortunately for Syriza and above all for the Greek people, the ECB has begun the disconnection of Greece. From this week on, the ECB will not accept Greek bonds (private or public) as collateral for lending money to banks at a low rate (0.5%). Since the Greek banks have mainly Greek bonds, that decision means no regular financing from now on. Greek banks will have to rely solely on the ELA or Emergency Liquidity Assistance, provided by the ECB. But the ECB has already announced that this ELA will be eliminated if the Government doesn’t renew the rescue agreement by February 28th. Dark clouds loom ahead.
My personal impression is that the protagonists of the day, Mr. Tsipras and Prof. Varoufakis, are negotiating as if it were 2010 . Prof. Varoufakis is supposedly an expert in game theory which applies to negotiation theory; but as The Economist states, “Mr Draghi is an expert in game practice” rather than game theory. That is the difference between a person of government and an academic (and this was said by an academic).
