How Greece outflanked Germany and won generous debt relief
Published: Aug 24, 2015 12:24 p.m. ET
Alexis Tsipras, who is likely to continue as Greek prime minister after precipitating a general election for next month, arrived in power in January attempting to resolve an “impossible trinity”: relaxing the economic squeeze, rescheduling Greece’s unpayable debts, and keeping the country in the euro.
Satisfactorily achieving all three aims appeared unachievable — and it was. Yet Tsipras appears to have achieved greater success than Angela Merkel, his main European sparring partner. The German chancellor, too, promised her electorate three unrealizable goals. However, frightened of being made a scapegoat worldwide for ejecting Greece from the euro EURUSD, +0.0089% , she seems to have caved in to international pressure even more than Tsipras.
The big question is whether, once the full generosity of Greek debt relief becomes widely known, other large-scale debtors around the world — ranging from indebted Chinese local authorities to borrowers from Italy, Portugal and Spain — will demand similar concessions from creditors.
The debt rescheduling under way for Greece, partly prompted by the International Monetary Fund’s accurate labelling of Greek debts as unsustainable, appears reminiscent of the relief that West Germany gained from a “troika” of international lenders (France, the U.K. and the U.S.) at the 1953 London debt conference.
At a time when global economic storm clouds are darkening, Greek voters may well thank Tsipras for shifting much of the country’s borrowings on to concessionary terms. The big question is whether, once the full generosity of Greek debt relief becomes widely known, other large-scale debtors around the world — ranging from indebted Chinese local authorities to borrowers from Italy, Portugal and Spain — will demand similar concessions from creditors.
The new €86 billion low-cost Greek bailout will probably not be fully redeemed until 2075 — a similar extension of loan repayments that was granted to West Germany in 1953, with some long-standing borrowings not repaid until 57 years later, in 2010.
Further effective Greek debt reductions will occur in the autumn as part of a deal to keep the IMF as a direct underwriter of Greek debt. Germany’s insistence on bringing in the IMF is politically expedient yet economically contradictory. Greece’s biggest creditor believes the only way to make its lending domestically palatable is to keep on board another lender (the IMF), which will do so only if Germany asks its taxpayers to shoulder fresh burdens through stretching out loan repayments and lowering interest costs.
Merkel’s promises to German voters have had a Tsipras-like quality: maintain the unity of euro members, avoid full-scale Greek debt restructuring, and keep euro economic policies in line with German-style orthodoxy. Both Merkel and Tspiras have resolved their individual “trilemmas” by attempting to keep their respective electorates in the dark about the extent to which they have diluted their principles.
Both have faced party revolts: Tsipras from the splitting of far-left factions from his Syriza party, Merkel from last week’s strong vote against the bailout by members of her Christian Democrat and Christian Social Union grouping.
Yet Tsipras is backed by 61% of the electorate, according to one poll, despite having to submit to creditor demands on economic restructuring. In the elections on Sept. 20 or 27, he will achieve his strategy of consolidating his political power base against divided and disheartened traditional parties that lack both desire and capacity to return to government in the foreseeable future.
Even though he will lose some Syriza rebels to a new far-left grouping, Tsipras can benefit from a possible coalition link up with two small pro-European parties — the Panhellenic Socialist Movement and center-left To Potami (The River). The third pro-European grouping, the center-right New Democracy, would lead the opposition. Tsipras is masterminding the election to profit from widespread domestic acknowledgment that he has resisted the more brutish demands of his creditors, yet before tax increases and spending cuts under the new bailout take effect in October.
As I have repeatedly written over the past six months, Greece has played a poor hand of negotiating cards with aplomb. Tsipras and Yanis Varoufakis, the former finance minister, devilishly abandoned diplomatic niceties yet gained maximum reward from European Realpolitik. My contention has been that the single currency’s most troublesome state would remain inside the euro as long as Greek nuisance value (GNV), both political and economic, was held to be lower inside the system (I) than it would be outside (O).
So far, GNV-O is still higher than GNV-I. All sorts of Greek maneuverings — talks with Russia, concerns about humanitarian disasters in the Mediterranean, speculation about a Greek exit bringing down the euro — have been useful ploys to keep that equation intact. Tsipras’s prize has been large-scale debt relief. If other international debtors follow suit, creditors face a nightmare.
MarketWatch
