Athen’s debt solution only possible through talks
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FOREIGN VIEWS
The end-game has begun between Athens and Brussels. The challenge remains to find a humane debt solution that would allow Greece to stay in the eurozone.
Since spring 2010, I have argued that the Greek bailouts have not resolved structural problems and are not designed to support the Greeks, or even the Greek economy. The recent Greek referendum illustrates why I have been skeptical and why continued talks are the only way out.
Prime Minister Alexis Tsipras did not resort to the referendum to end the negotiations, but to extend the talks and to ensure a better hand. And that’s what he got. Some 62 percent of Greeks voted against the creditors’s June 25 proposal.
In Greece, the Syriza-led coalition came to power in January; after seven years of consequent economic contractions. In 2000, Greek per capita income was still US$21,000, almost twice as high as that in Poland. Today it is less than US$26,000, or about the same as in Poland.
Ironically, the bailouts have contributed to the collapse of living standards. Athens returned to markets only on the back of two huge bailouts of 73 billion euros and 164 billion euros, respectively. And yet, at the same time, the Greek public debt soared to 323 billion euros ; or 175 percent of the GDP. Hence, seven years of contractions, 25 percent unemployment rate, and youth unemployment that still exceeds 50 percent.
Barely 11 percent of the 254 billion euros, which the troika has lent to the Greek government, has been spent to meet the Greek government’s current expenditure. Almost 90 percent has gone to private banks, particularly those in Germany and France.
The Greek referendum ensued as the European leaders rejected the Tsipras proposal requesting an extension of the bailout program, which expired on June 30, and the effort at a new 29.1 billion euros bailout package. While the proposal would have covered Greece’s debt obligations over the next two years, its rejection led to a de facto default on the country’s 1.6 billion euros loan repayment to the International Monetary Fund (IMF).
Now there are three basic post-referendum scenarios.
Back to talks. Syriza will push its June 30 proposal, which may be modified in detail but not in substance. In turn, the creditors will argue in Brussels that “a bad deal is better than no deal.”
Athens gets tough. Tsipras will use his new political muscle to argue that Greek people demand immediate debt relief and a bailout. But the scenario is less likely because Brussels would reject Syriza’s terms, which would result in the collapse of talks and an eventual Grexit.
Creditors get tougher. The creditors will not retreat from their June 25 proposal, which the Greek referendum effectively rejected. If the Syriza-led coalition would reject the deal, Greece would default.
European equity markets have been down. In Asia, the Greek debt crisis has unnerved regional equity markets.
Asian liabilities owed to European banks are only 5 percent of the region’s GDP, with China’s exposure lowest (3 percent of GDP) and Malaysia’s highest (18 percent of GDP). Nevertheless, recent “Grexit” fears caused Hong Kong’s Hang Seng Index to have its sharpest one-day decline in years.
Calls have become more vocal in Washington, Beijing and Moscow for Athens and Brussels to seek a compromise that allows Greece to remain in the eurozone. If Brussels fails to contain the financial reverberations from the Greek crisis, the contagion could prove wider than currently anticipated. It is time for Athens and Brussels to talk.
Dr Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China). For more, see http://www.differencegroup.net
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