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Friday, July 3, 2015

It was the creditors who pushed Greece over the edge



by Jerome Roos (ROAR Mag) on July 1, 2015

3 July by Jerome Roos

Image: sticking posters for the NO campaign ahead of Sunday’s referendum.
If they had truly cared, the creditors could have easily prevented a default. Sadly, they found it more important to punish Greece and set an example.

On Tuesday, Greece became the first developed country to default on the IMF — and the pro-creditor camp is already propagating the convenient self-serving myth that the country’s “radical” and “irresponsible” government is somehow to blame for this. Nothing could be further from the truth.

To begin with, we should note that defaults come in many forms and guises — and not all of them are the debtor’s fault. In my own research on the political economy of sovereign debt, I identify at least four types of default: (1) negotiated reschedulings; (2) voluntary restructurings; (3) unilateral moratoriums; and (4) outright debt repudiations.

What is interesting about sovereign debt in general (and about international lending in particular) is the almost wholesale absence of repudiation. By and large, countries try extremely hard to repay their debts in full and on time — even when they cannot. In the worst case scenarios, they may be able to negotiate a rescheduling or restructuring of the debt with their lenders. In exceptional cases, countries can declare a moratorium on repayments. While this was very common prior to World War II, it is extremely rare today.


In this respect, the first thing to note is that Greece clearly did not repudiate its debts outright: despite the preliminary conclusions of the Greek parliamentary debt audit committee, which found much of the country’s debt to be odious, illegitimate and illegal, the Syriza/ANEL government still formally recognizes the legally binding character of the debt contracts. Its IMF default therefore looks more like an undeclared moratorium: Greece could still settle its arrears with the Fund at a later stage if it somehow managed to secure new credit.

The second thing to note is that Greece clearly cannot repay its debts in full: even the IMFrecognizes that it needs serious debt relief to make its debts sustainable. Still, the country’s left-led government committed itself to remaining current on its obligations even under the most difficult circumstances imaginable. Over the past five months, Syriza basically did the impossible: it continued to repay foreign creditors even though it didn’t receive a dime in foreign financing.

So how did it find the money for these practically unsustainable debt payments? Well, it generated them domestically from taxes and budget cuts — along with a de facto default on government suppliers. Long before Greece defaulted on the IMF, it defaulted on its own people and on the private sector firms that do business with the government, just so it could keep servicing its external debts.

In fact, for all the talk of Greek “profligacy” and Syriza’s free-spending ways, the left-led government would have run the largest primary surpluses in the EU by far. In fact, Syriza’s budget would have been the most austere on the continent:

Source: Economist (2015)

Now, the reason Greece has hit a wall and defaulted on the IMF is very simple: despite running primary surpluses, it basically ran out of cash reserves — and the fact that it ran out was clearly not its own fault.

For one, Greece’s repayment schedule for 2015 was simply unrealistic; the summer especially is full of huge payments. Moreover, the creditors showed absolutely no willingness to reschedule or restructure Greece’s debt profile. The creditors’ stubborn refusal to make any concessions in the negotiations also contributed to continued uncertainty, affecting growth and tax collection. This combination of factors made an involuntary moratorium on the IMF inevitable.

But it gets worse. If the creditors had truly cared about preventing a Greek default, they could have done so at the flick of a switch. The Eurogroup and IMF still owed Greece the last 7.2 billion euro tranche of its previously agreed bailout package, while the ECB owed it nearly 2 billion euros in withheld profits on Greek bonds, which it was supposed to return to the government. If the lenders really didn’t want Greece to default, they could have simply transferred this money from one part of the Troika to another — problem solved!

But it should be clear by now that the standoff between Greece and its creditors is no longer about the money: it’s about power and control. The creditors were adamant not to encourage Syriza’s resistance, for this might embolden anti-austerity forces elsewhere — most notably in Spain, where Podemos might well win the next elections. They wanted to set an example.

The only possible way Greece could have obtained further financing to repay the IMF this week would have been to sign up to the self-defeating “take-it-or-leave-it” offer made by the creditors last Friday. This would have been suicidal both for Syriza and for Greece. It was obvious from the start that Tsipras would be unwilling and unable to submit to the same austerity measures that had produced such disastrous economic consequences under previous governments, and against which he had been campaigning so aggressively for all those years.

And so the bottomline is that Greece was pushed over the edge by its own creditors. Its left-led government is clearly still willing to pay — just not at all costs, like previous governments. In fact, Syriza rightly demands a fairer distribution in the burden sharing, a sustainable long-term payment trajectory, and a sovereign say in the way it chooses to meet its obligations — by taxing shipowners, bankers and media magnates, for example, rather than cutting the wages and benefits of workers, pensioners and the unemployed.

If this is considered “radical” and “irresponsible” in Europe today, it’s only because the center has shifted light-years to the right. Unfortunately, that is precisely what has happened. If anyone bears responsibility for the Greek default on the IMF, it is the extremists in the creditor camp who would rather suffocate their borrowers than ensure continued repayment.


Jerome Roos is a PhD researcher in International Political Economy at the European University Institute, and founding editor of ROAR Magazine. Follow him on Twitter at @JeromeRoos.


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