authored by

John Kierans
July 2015

The best way to understand the standoff between Europe and Greece is contemplate the undeliverables.

First the liars.

The best way to understand the standoff between Europe and Greece is contemplate the undeliverables.

Greece wants a debt write-down from Europe.  European finance ministers from ‘bailout’ nations cannot sell a debt write-down for the Greeks to their home electorates.  Irish voters would ask Noonan why he failed to get a cut in debt for Ireland.  Clever economists would point out that the minister had in fact increased our national debt by shifting a proportion of Greek national debt from the Greek national ledger to the Irish national ledger.  Opposition TDs would sneer at Fine Gael and Labour’s pre-election boasts of how they would renegotiate Ireland’s debts!  The Irish, Portuguese and Spanish would need to be part of any debt write down.

As for the Cypriots, God only knows.  You may recall that Cyprus endured the newest version of a Troika bailout, the ‘bail in’.  The Troika took €8Bn of depositor money from depositors, (47.5% of deposits above €100k).  

Bailed out and bailed in nations will require the same terms as Greece if the Greeks are to be given a debt write-down.

But what of the so called ‘creditor nations’.  The politics in these nations is no less difficult.  The German and French electorates are laboring under the illusion that they are somehow paying for Greece.  In order for Frau Markel and Monsieur Hollande to sell them an Irish, Greek, Portuguese, Spanish and indeed Cypriot debt write-down they will have to tell some home truths.

Foremost the French/German electorate will need to be disabused of the bail-out myth.  When Greece went bust it had a future whether bailed out or not.  The Greeks then as now will now carry on regardless.  In short order their tax collections and spending would equalize.   A nation doesn’t go out of business.  On the other hand, the same cannot be said of the French and German banks et al that lent money to Greece, Ireland, Spain, Portugal and Cyprus.  Without a bail out they would have gone out of business.  Without a bailout they could not have carried on regardless.

To sell a European debt write down I suspect the French and Germans will need to persuade their electorates that they themselves are in fact the beneficiaries.  This is a very tricky proposition for the Germans in particular.  

It is at the very least extremely difficult if not impossible for the political liars in both creditor and debtor nations to deliver on a European wide debt write down in the short term.        

The Wing Nuts

Europe wants Greece to deliver budget surpluses by increasing taxes (and tax collection) and cutting spending.

Alexis Tsipras and his SYRIZA are right about one thing and one thing only.  Greece is bust and it is counterproductive to continue to the policy of ‘extend and pretend’.  They are asking the Troika to write down their debt.

In the meantime the SYRIZA political coalition is demonstrating to all that they are incapable of governing and very poor at negotiating.  When they came into power Greece was in a primary surplus.  This means that they took in more in taxes than they spent before making any debt repayments.  This was a great position of strength from which to negotiate or even repudiate their debts.  However they immediately set about reversing this by reversing previous government cuts, rehiring thousands of civil servants and increasing spending generally.  Within six months of obtaining power Mr. Tsipras hasn’t enough money to pay his bills month to month without asking for more money from the very people from whom he is also demanding a debt write down.

The proposals that the Greeks submitted to the Troika recently are long on tax increases and short on cost cuts.  In short they are loony left wing nuts and if they ever delivered a budget surplus it would be an accident.  Their political beliefs render them incapable of paying down any debt.

In the short term it is politically impossible for the SYRIZA Party to sell austerity to their electorate.  


I have suggested above that politically is very difficult to forecast how a deal can be done between Greece and Europe.  However, consider the alternative.  Greece leaves and goes back to the Drachma.  The debt of member nations of the Eurozone shoots straight up to between 2% and 3% for most nations.  Contagion risk spikes in Italy, Spain and Portugal.  A belligerent Greece cozy’s up to Russia.

Neither Europe nor Greece wants this.

return to commentaries