According to the NY Times, the IMF has refused to participate in any new bailout program for Greece unless Hellas is receiving debt relief. Specifically, says the IMF, this relief must come in one of three ways to be determined by Greece and the Troika: reducing the amount of principal debt to be repaid (“writedowns”), extending the term of the loans (the IMF suggest no payments for 30 years), or interest rate subsidies that would allow Greece to repay its loans at rates substantially below their market value. In practice part of the debt (around€100bn) was already discharged in 2012 via debt swaps that amounted to writedowns. And some of the third and a bit of the second were already being done under the old bailout regime, and both would have been part of the new agreement reached last weekend as well.
But those are less than half-measures in the face of an onrushing avalanche. Continue reading
[UPDATE: This provides more detail and context than I do. Read it instead of, or at least in addition to, my post.]
Thomas Piketty has decided that because Germany was the beneficiary of debt relief in 1953 that they should extend the same privilege to Greece today:
When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: What a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.
Before explaining why this is both normatively and positively misguided I would like to clear some brush by mentioning two things. First, everyone (including me!) agrees that Greece’s debt must be written down. In fact, a gradual disposal of Greece’s debt has been a part of bailout program since 2010 and more of it will be discharged in the future. Greece has not paid back a single cent on net. In the meantime the debt is being financed through rollovers whose interest is mostly being paid by the rest of Europe while Greece has received fiscal transfers equivalent to more than 100% of GDP. So it is not an accurate characterization of the situation to say that the Greek economy is being squeezed in order to pay back debt; it is being squeezed because its level of spending was not matched by its level of productivity. And in some ways it still is not, although it is now quite close.
Second, while it would be very nice to have an international bankruptcy mechanism that would allow us to discharge debt and reorganize national economies in an orderly fashion, governments are unlikely to cede sovereignty over this issue for understandable reasons. So ad hoc bargaining is what we’re stuck with for the foreseeable future.
In the Greek bailout episode the Greek government has been behaving much like the self-pitying Antonio from “The Merchant of Venice,” while the EU has been posing as a rather heavy-handed Shylock. Despite being aware of the damaging consequences of a Greek default and potential exit from the Eurozone, the EU seems intent of having its pound of flesh. By subjecting Greece to additional austerity provisions, it may be risking the revival of the Euro financial crisis—this time with serious geostrategic implications.
For five years the Greek people have been dealing with a series of austerity measures that have crippled their economic prospects. The Greek economy has contracted a jaw-dropping 25% during this period, forcing Greece into a deep recession that now borders on depression, with a 26% unemployment rate and a debt level of 180% of GDP. The resulting loss of jobs and livelihoods has been staggering; tens of thousands of Greeks are barely getting by.
But on the eve of its default this week the Greek government capitulated and at the 11th hour informed the EU it would accept additional austerity after all, only to be told by the EU that its offer had expired. Adding insult to injury, a senior EU official stated “The previous program has expired. So now we need to start new negotiations as regards a new program.” Tragically, Greece may no longer be in the Eurozone by then. Continue reading
I would like to cut through a lot of the rhetoric and discuss where we are with the Greece crisis and where we are likely to be quite soon. I will conclude with some thoughts as to why this has been an enormous failure on the part of Syriza and the intellectual left that has supported it, and it will come with a very high cost. TL;DR: Wishful thinking is no substitute for real analysis. The European North made its position on indefinite financing of the South (and East) clear before the euro came into being. In fact, that was a condition for the euro to come into being. It has not changed. The deal was fundamentally the same in 1997 as it is today and will be tomorrow.
Here’s where we are:
So this post is a bleg to those of you who know more about alliances than me. I am considering writing this up for an article, so I thought I would ‘crowd-source’ early comments on the basic argument. I also wonder if someone elsewhere has already suggested this idea in the vast alliance literature. So please let me know. The motivation is inductive – the deepening tension between Japan and Korea has suggested the addendum to alliance theory I am proposing here. But I wonder if others have said this before.
Put briefly, I don’t think entrapment or abandonment captures the US position between allies in dispute, like Japan and Korea, or Greece and Turkey (perhaps – I know that latter case less well). Instead, each seems to use the US alliance patron to: a) compete with each other, because b) the US alliance relieves external pressures (China and North Korea, and the USSR and chaos in the Balkans and Middle East, respectively) that would otherwise incentivize a rapprochement. These four states are not trying to ‘entrap’ the US so much as leverage it for an intra-alliance squabble, with the shared patron as referee. I’ve not read this theorized elsewhere, so here is an effort to do so.
The entire bit is good, but the really good part begins about 3:30 into this video from last Thursday’s “Colbert Report.”
“Invest in Europe, where culture, history and fun are always having a three-way.”
Is this the end of the grand Eurozone experiment? I have to admit that I’ve had a general feeling for the past couple of months that the Germans would, in the end, cough up a bail-out package for Greece because of a sense that there is no real alternative. But, despite the fact that Angela Merkel finally appears to be asserting herself, now I’m really not sure how it will end. Rumors are swirling that Portugal and Spain will also need bailouts to meet excessive debt burdens after their debt ratings were downgraded. And, although Spain is looking more at a current liquidity problem than insolvency like Greece, this won’t matter to German parliamentarians who already can’t stomach bailing out Greece and ultimately bankrolling Greece’s inefficient and corrupt public sector and generous pension system. On top of all of that, German state elections in North Rhine-Westphalia on May 9 will be a free for all if the Bundestag passes a bailout.
So, we are left waiting on the Germans, the terms of an IMF bailout package, and/or whether or not the Greeks will entertain some form of debt restructuring, abandon the Euro, or default. None of these are particularly palatable and given the tensions between the European Central Bank and the IMF as well as the domestic political situations in both Germany and Greece, there are going to be some big losers before this all gets resolved. Things really don’t look good for the current Eurozone — either in the short-term or the long-run. Mlada was right, IPE is really interesting again….