On the Greek crisis, New Syriza Government and Current Negotiations with the Eurozone: Or, How to Avoid an Accident until a Compromise is Reached – by Theodore Koutsobinas

On the Greek crisis, New Syriza Government and Current Negotiations with the Eurozone: Or, How to Avoid an Accident until a Compromise is Reached - by Theodore Koutsobinas

As initial results of the negotiations between the new Greek government and the EU are expected to be announced tonight, Dr Theodore Koutsobinas looks at the context and suggests a way forward.

With a prolonged deep recession since 2010, Greece has lived in a world of depression economics and politics for quite a long time now. With a GDP shrinking at around 70% of pre-crisis levels, public debt of more than 170% of GDP and with unemployment at 27%, the sentiment of despair among the Greek people became inevitable. Although this sentiment has often escaped common sense, it brought to surface the importance of hope.

Capitalizing on the austerity economics of previous governments, militant rhetoric and populist promises Syriza restored hope for many people in Greece by winning a national election for the Left that would have been unimaginable a few years ago. While the new government’s domestic agenda is broadly understandable because it aims at improving the situation of the poorest and worst hit households through transfers, the rise of minimum wage, employment protection in the state sector and fiscal expansionary policies, the question that remains: how can it be financed in practice?

With the implementation of tax collection even for the top income shares being historically slow in Greece, the domestic pillar of Syriza’s policy depends ultimately on the impact of repayments of the Greek public debt held mainly by Eurozone countries, the ECB and the IMF. The new Greek government won the national election on its promise to the electorate that it will act unilaterally by tearing apart the previous protocol of agreement (or, “mnimonio”) with the creditors of the country and that it will renegotiate towards an immediate write-off of a massive part of the current nominal value of the Greek public debt and a reduction of short-term obligations attained through tying debt and interest repayment to the rate of economic growth.

Alas, despite early and highly publicized bitter exchanges with Eurozone officials and a non-compromising posture, the new stylish Minister of Finance of Greece, hurried to declare on fears of financial markets instability last week that Greece does not wish a debt haircut and that 70% of the protocol with its creditors is in line with the objectives of the new government. Despite criticism from influential government ministers of ultra-left persuasion, Varoufakis opens this Wednesday officially the negotiation process with the country’s creditors in a Eurogroup session with the objective of a mutually satisfactory compromise. But, in the face of a possible countdown with Germany and its allies as during last year with Cyprus, what can he hope for?

He has campaigned earlier for a European conference on debt forgiveness citing the similar example of London conference for Germany in 1953 and he has proposed a “modest” change of European monetary architecture through a mutualization of a big part of the debt of each member state. However, despite its geopolitical advantage near the middle-east Greece does not stand in the same position as Germany in 1953 when its support was critical for the Western world against the Iron Curtain. Similarly, despite its broad support even in mainstream economic literature and among various politicians, the objective of mutualization (and, later on of a banking union and of a Eurozone treasury) is a broader Eurozone architecture issue that will be addressed only when the right time arrives for the big players of the Union and not, unfortunately, for tackling the Greek crisis.

Thus, besides a call for a New Deal in Greece, which again begs for an answer as to who is going to finance it, Varoufakis arrives fresh to negotiations mainly with a proposal to replace the existing debt in the hands of Eurozone countries with financial instruments. In the past, the Minister mentioned speculatively the possible use of perpetual bonds as well as of bonds tied to clauses of growth. Lazard, the new financial advisors of the Greek government favor swaps of public debt, another financial engineering instrument. It is quite possible that even a greater variety of financial instruments can be also utilized towards nominal debt burden relief. For the moment, long-term write-downs of current nominal value of Greek debt to its sovereign creditors to make growth sustainable is unacceptable to Germany and the rest of Eurozone countries. In addition, there is expressed intention by those countries that Greece must not suffer a bankruptcy within the Eurozone, or a Grexit.

On the other hand, the restructuring of the future nominal value of Greek debt is both feasible and desirable. Greece’s possible agreement with its creditors on a financial engineering solution, whether this includes prolonging the debt maturity, swaps, some variation of perpetual bonds, interest payment freezing, debt parking or other forms of structured finance is therefore optimal at the current negotiation stage. This happens because it lessens significantly the burden of debt payments, helps the country to avoid unintended bankruptcy and to earn critical time to benefit from participating in the QE scheme of the ECB. Finally, it may build an agreement to allow Greece to participate in some early form of a pro-growth intra-European surplus recycling mechanism through selective EIB finance.

783477449This pragmatic approach contrasts with expressed hopes among Syriza’s leading officials that Greece can benefit from causing a systemic financial turmoil in global markets through the threat of Grexit. Such hopes are often coupled with the wish that Greece may turn Eurosceptic by resorting to financial help from Russia or China (thus, becoming a geopolitical concern for NATO). Overall, the pragmatic approach is a far cry from a negotiation framework set in the form of a distributive race between rich North and impoverished as well as depressed South, or humanitarian Greeks and self-seeking, if not inhumane, Germans leading way to another stated negotiation strategy, namely, the threat of demanding Germany to pay huge unpaid WWII reparations to Greece.

It is obvious that such priorities that fit very well with the ultra-left sensibilities of Syriza party and are expressed as a way of undermining ideologically the effectiveness of social democracy in the European project are not effective strategies for the current solution to the negotiation. My prediction is that the financial engineering solution, which I described as best possible scenario for now will not only save the Eurozone from instability and Greece from bankruptcy but will initiate cracks in the heterogeneous alliance between neo-communist hardliners on the one hand and pragmatic social reformers in Greece’s ruling party, and may result in changes in the political landscape of the country very soon.


THeoDr. Theodore Koutsobinas is a Lecturer at the University of Patras and Author of The Political Economy of Status: Superstars, Markets and Culture Change, published by Edward Elgar, 2014

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  1. The Progressive Economics Forum » ROCHON On Greece once More - February 18, 2015

    […]  Regardless of the solution chosen, the debt imbroglio is only the first step toward a full Greek recovery. Greece then has to wage an all-out war on growth, and get its economy back on some firmer ground. At this point, it will take considerable time and energy, and nothing short of a New Deal (see Theodore Koutsobinas’s blog here). […]

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