Can U.S. Bring an End to Greek Drama?
The U.S. government has taken care over the past four months to stay out of the Greek crisis, at least in public. President Barack Obama antagonized many European governments back in February when he warned that “you cannot keep on squeezing countries that are in the midst of depression,” which was widely interpreted as endorsing the new Greek government’s leftist program. Since then, the administration had largely kept its counsel private.
But that changed last week when U.S. Treasury Secretary Jacob Lew, speaking in London and at a meeting of finance chiefs from the Group of Seven leading nations in Dresden, Germany, urged Greece and its creditors to show more flexibility, warning both sides that “brinkmanship is a dangerous thing when it only takes one accident.”
Mr. Lew’s intervention shows how serious the crisis has become. Despite repeated assurances from Athens that a deal is close, nobody at the G-7 summit thought this remotely true. Sure, progress has been made, but mostly on less controversial issues such as strengthening the independence of the tax-collection authority.
But on the big issues that have held up aid to Greece since last summer—including overhauls to its pension system, changes to its labor market, and agreements on its fiscal targets—Greece and its creditors remain miles apart.
Meanwhile, the clock is ticking. It isn’t clear whether Athens can find the cash to repay $1.6 billion owed to the International Monetary Fund this month, the first installment of which is due on Friday. The two sides will need to agree on a deal in the next few days to allow time to jump through the legal hoops required for funds to be disbursed before the bailout program expires at the end of June.
Will Mr. Lew’s intervention help? No, according to some senior EU officials. They fear his comments will harden positions on both sides: Eurozone governments won’t appreciate the U.S. interfering in something that isn’t its business. “If the U.S. wants to make Greece its business, it should put its own money on the table,” says one official.
More importantly, they fear that Mr. Lew risks feeding what they say is the delusion that Athens enjoys protected status because of its geopolitical importance, and that U.S. protections will ensure its brinkmanship pays off.
European officials also fear that the U.S. administration underestimates the negative consequences of a eurozone surrender to Greek demands, since not only will this push up Greece’s short- and long-term funding needs to politically unacceptable levels, but also because tearing up eurozone rules could put the long-term stability of the currency union at risk.
U.S. officials appear sensitive to these criticisms. Although Mr. Lew has called for both sides to show flexibility, he has also made clear in public and in private, including in two conversations with Greek Prime Minister Alexis Tsipras, that the first move must come from the Greek side, according to someone familiar with the discussions: “Job No. 1 is for Athens to roll up its sleeves and come forward with meaningful reforms,” this person said.
Nor will the Treasury pressure the eurozone to do a deal if the Greeks are intransigent or reject necessary reforms.
The problem is that it isn’t just Greece and its creditors that can’t agree on what are the necessary reforms; the creditors appear divided too.
The IMF is insisting on pension reforms that the European Commission, or at least some commission officials, agrees with Athens are likely to prove recessionary and therefore will deepen Greece’s short and long-term funding needs.
In contrast, the IMF believes that these are essential to put Greece’s finances on a sustainable footing and meet the demanding hurdle required under IMF rules for disbursing its cash. Without these changes, the IMF believes that the eurozone will need to promise Greece substantial short-term funding and long-term debt relief.
So far, the IMF is standing firm. It was widely criticized for its optimistic assessment of Greece’s debt sustainability in 2010 and is determined not to repeat the same mistake. It argues that breaking its rules for Greece would undermine its ability to force other debtor countries to take unpopular measures, putting its own credibility at stake.
Yet the IMF’s endorsement of any deal is essential to many eurozone governments to provide political cover to allow them to disburse their taxpayers’ cash in fresh aid for Greece.
Ultimately, the only way out of this impasse is likely to be a grand bargain, whereby Athens agrees to implement the reforms that the IMF is demanding in return for a lower deficit target and a commitment from eurozone governments that they will provide the short-term funding and long-term debt relief needed to satisfy the IMF that Greece’s debt will be put on a sustainable footing.
The question is whether this grand bargain can be reached in time for Athens to receive the cash needed to avoid an accidental default.
Indeed, this is what appears to be uppermost in the minds of U.S. officials—and the chief point of difference with their eurozone counterparts. While neither side is complacent about the consequences of a default, U.S. policy makers are clearly more fearful of the likely impact on the global economy.
Although the eurozone now has more tools to tackle a crisis since the European Central Bank launched its bond-buying program in March, U.S. officials believe a default is still likely to deliver a substantial shock. “On a scale of one to 10, where the collapse of Lehman is a 10, a Greek default would likely register as a six; that is down from eight in 2012,” reckons one U.S. official.
But European policy makers suspect that the risks of a Greek default would be manageable and argue that the Lehman comparisons are wrong: Of course, traders who bet the eurozone would never let Greece go would be caught out. But unlike the Lehman collapse, they argue, a Greek default wouldn’t trigger the same frantic scramble to identify who was exposed, nor would it cause the entire global financial system to question the value of its collateral.
Indeed, eurozone policy makers seem increasingly confident that a Greek default won’t inevitably lead to a euro exit and so wouldn’t be the end of the saga. In fact, it might even be the only way to persuade Athens to accept the necessary compromises.
Mr. Lew won’t have to wait long to find out whether his warnings were heeded—or his fears justified.
wsj
