Following Sunday’s rejection of its latest- yet expired- bailout terms in a national referendum, there has been growing fear that Greece may soon exit the Euro. Greece’s Syriza government- elected in January by popular disdain for the austerity measures imposed by its creditors- has been reluctant to continue with the structural reforms initiated under previous bailout agreements and impolitic in its diplomacy with its financiers. Who is to blame? In short, everyone.
The International Monetary Fund, holders of €48.1 billion in Greek Debt, released an internal report Friday concluding that while Greece failed to make meaningful progress toward liberalizing their economy, even if they had, it would have been exceedingly optimistic to think they could have ever paid their debts in full. The Wall Street Journal has an excellent graphic showing the owners of Greek debt and the current timeline for repayment:
If it seemed unlikely that Greece would be able to pay back its debts in the long run (~175% of its GDP), why continue to loan it the money to do so? Two main reasons:
· Acknowledging that it would be unable to pay its debts, and therefore having lenders write substantial portions of it off, would create a precedent for other indebted Eurozone countries to refuse reform measures and demand debt write-offs (ex. Portugal, Spain, Ireland). Populist governments would be emboldened, the cost of borrowing would grow exponentially as market credibility diminished, and the politics of the EU would become ever more toxic- threatening incumbent/establishment politicians across the spectrum.
· Eventually, if not immediately, the biggest losers if the Greeks are to default on some or all of their debt are other European taxpayers. The vast majority of Greek debt is held directly by European state governments, European institutions (whose ‘shareholders’ are European states) and by private European banks. Billion dollar losses would trickle down through pension funds, shareholdings, and central bank sheets to the streets of Paris and Berlin.
So what is likely to happen? Despite the vitriolic rhetoric crisscrossing the continent between Brussels and Athens, the fundamental pressures for both sides to cut a deal have not changed. The Greek government is still aware of the disaster that would ensue from adopting the Drachma, dropping the Euro, leaving the European Union, and being ostracized by international finance markets. European governments are still cognizant that intransigence on moderating their bailout terms- and by default accepting nothing over something- will be disastrous both politically and economically. What therefore seems most likely is that European governments agree to gorge a politically poisonous pill and forgive a percentage of Greek debt in exchange for minor structural concessions from the Greek government- who will walk away looking prescient and victorious to their constituents, despite having been to the edge of the abyss.
If this result is realized, its details still leave the future uncertain: will the debt reduction amount to postponing the crisis or economic renewal? Will voters in Spain elect Podemos and play their own round of Russian roulette with the EU? Will David Cameron be emboldened to demand more autonomy for the UK in the run-up to his referendum on Europe? Will the German foundation of Europe begin to crack?
Whatever happens this week, there will be few answers and many questions.
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