The first thing to understand about the Greek debt crisis is that it’s not about Greek debt. It’s about politics and pain. (More)
Greece vs. Europe, Part I: The Politics of Pain
This week Morning Feature follows the (non)negotiations between Greece and Europe. Today we see how a debt crisis and depression became five-year case study in the politics of pain. Tomorrow we’ll explore why there are no good short-term solutions for the Greek economy. Saturday we’ll conclude with Europe’s Articles of Confederation challenge.
“That would not constitute a default under our criteria”
Standard and Poor’s, Fitch and DBRS, three of the top four, all say that as the IMF and ECB are not standard creditors, a missed payment to either, although likely to push Greece’s rating even deeper into junk, would not be classed as a default.
“If Greece were, for whatever reason, not to make a payment to the IMF or ECB that would not constitute a default under our criteria as it is ‘official’ sector debt,” said Frank Gill, who rates Greece for S&P.
The difference is not trivial. If Greece were placed in default, the European Central Bank could not treat Greek sovereign bonds as collateral for emergency lending assistance (ELA), as the Washington Post’s Matt O’Brien explains:
As a practical matter, though, [missing the IMF payment] isn’t quite as bad as it sounds. That, more than anything else, tells you how serious the situation is in Greece right now: a debt default isn’t even their biggest problem. So what is? Their banks. And the good news, insofar as there is any, is that this default shouldn’t make things any worse for them. That’s because the credit rating agencies technically won’t even count this as a “default” since it’s not on private investors. That, in turn, means the European Central Bank should still, if it wants, have the wiggle room to consider the Greek government solvent enough to keep guaranteeing the bonds its banks have. Why does that matter? Well, without that guarantee, the banks can’t use those bonds as collateral for ECB-approved emergency loans, and without those emergency loans, they would collapse. So this default shouldn’t make Greece’s financial system disintegrate overnight, which is about all it can ask for at this point.
“And then they start talking about their personal life: how they lost their job, their financial difficulties”
The threat of a Greek bank collapse is real, but to call it “their biggest problem” is more technocratic than true. Beneath the dry economic statistics on GDP growth, debt, and budgets, Greece faces a humanitarian crisis:
Athina Tatsioni sees it every day at the University Hospital of Ioannina, where she is an emergency-room doctor. When she started in 2009, there was a maximum of 280 patients per day. Now, she and her colleagues are overwhelmed by more than 600 patients a day. Many have lost their health insurance with their jobs and can’t afford to pay for care. They show up with late-stage disease, leaving serious conditions like diabetes untreated until they can’t live another day without seeing a doctor.
“There are days when we see several patients in a row, and they all come for similar complaints – chest tightness, headaches. We run all the tests, and we find nothing,” she told Vox. “And then they start talking about their personal life: how they lost their job, their financial difficulties.”
Media memes to the contrary, the Greek government cut spending:
— Simon Tilford (@SimonTilford) June 29, 2015
Replies to that tweet object that Greek public spending has risen as a percentage of GDP, but that’s because austerity plunged Greece into depression:
“Responsibility and corresponding rewards”
While Greek Prime Minister Alexis Tsipras offered to accept the EU’s bailout demands yesterday, European leaders refused to take yes for an answer:
Jeroen Dijsselbloem, the Dutch finance minister, said in a statement after a conference call of the Eurogroup of finance ministers that there would be no more discussion with Greece until after the referendum.
“We see no grounds for further talks at this point,” he said.
Chancellor Angela Merkel of Germany, who met Wednesday with Prime Minister Matteo Renzi of Italy, repeated her position that there should be no negotiations until after Greece holds its referendum – a vote that many European leaders hoped would amount to a rebuke of Mr. Tsipras.
“The overarching goal has always been to create a union of stability in Europe, with responsibility and corresponding rewards,” the chancellor said.
If Chancellor Merkel’s comments seem thick with moralistic contempt, they are, as Vox’s Dylan Matthews reports:
Jane Kramer’s profile of Italian prime minister Matteo Renzi in last week’s New Yorker only mentions Greece by name once. But toward the end, there’s a paragraph that perfectly sums up why Germany has been pushing policies on Greece that look clearly unsustainable to most outside observers:
[Former Italian prime minister Mario] Monti told me that, when he was Prime Minister and visited Barack Obama at the White House, Obama admitted to being at a loss to know “how to engage Merkel on matters of economic policy.” Obama asked his advice, and Monti replied, “For Germans, economics is still part of moral philosophy, so don’t even try to suggest that the way to help Europe grow is through public spending. In Germany, growth is the reward for virtuous economics, and the word for ‘guilt’ and ‘debt’ is the same.”
“Nobody wants to back Syriza”
Simply, in the German worldview, to be in debt and unable to pay is to deserve punishment. Never mind that banks in Germany and elsewhere gleefully loaned Greece the money, as John Hopkins international economics and international relations professor Matthias Matthijs explained to the Washington Post’s Ana Swanson:
In anticipation of the euro zone, investors put lots of money in the cheap, high-yielding bonds of southern Europe. That helped to drive down yields and fueled borrowing and an economic boom in southern countries.
Ultimately, investors were right – Greek interest rates on 10-year bonds fell from around 20 percent in the early 1990s to only 3 percent in 2002. “They made a lot of money in the north betting against higher interest rates there. That fueled the boom, before the euro came, that overheated these economies.”
In short, many in the north pushed for a financial regime that didn’t fit the Greek economy, because they personally stood to benefit. Many rightly blame the Greeks for its current crisis, but some of the blame belongs farther north as well, [Matthijs] argues.
In other words, bankers in Germany and elsewhere made a lot of money betting on the Greek economy. Prime Minister Tsipras tried to make a case against the German insistence on austerity as the only path to prosperity, in a series of op-eds in Ireland and France. But the New York Times’ Neil Irwin writes that the Greek gambit backfired:
The Greek government was surely hoping that by walking away and calling a referendum, the creditors would rethink their intransigence, fearful of the economic and geopolitical consequences of letting Greece leave the eurozone. If anything, it pushed Germany and France, as well as Spain and Italy, closer together, full of exasperation with the Greeks’ negotiating style and aggressive demands.
The Times’ Andrew Higgins quotes the prevailing narrative:
“Germany is essentially the hegemon in Europe, but it does not like being seen as running the show,” said Charles Grant, the director of the Center for European Reform, a research group in London. And, unlike Syriza, it works hard to lobby support from other countries. Greece’s left-wing government, Mr. Grant added, has itself strengthened Germany’s hand in pushing for austerity by “behaving so appallingly” that it alienated countries like France and Italy that were initially more sympathetic to Greek arguments in favor of debt relief and a relaxing of demands for budget cuts.
“This is the tragedy in all this,” Mr. Grant said. “There was a chance to use Greece’s suffering to get the Germans to understand that their economic weltanschauung or worldview is partially flawed. But Syriza’s behavior has let the Germans off the hook. It rallied other countries around the Germans, because nobody wants to back Syriza.”
“It’s in Europe’s interest to make things as hard as possible for Greece”
Prime Minister Tsipras’ government may have supplied convenient excuses, but Vox’s Matthew Yglesias reports that European leaders have another reason to demolish Syriza … political self-interest:
After all, if electing a bunch of far-left types to parliament so they can demand a better deal actually worked, then voters in Portugal and Spain and Italy and Ireland would take note of that fact. And the last thing the current crop of elected officials in Lisbon and Madrid and Rome and Dublin want is to all be turned out in favor of a bunch of far-left types.
Politically, Yglesias writes, European leaders are making Greece an object lesson for other debtor nations:
After all, if a default works out non-disastrously for Greece then other countries could be tempted to default. And international investors might worry that other countries could be tempted to default, raising interest rates and slowing the European economy. Only making default as painful as possible can safeguard the interests of other countries.
Here’s where the news gets really bad for Greece. Leaving the Eurozone could, in theory, go better or worse. But Europe needs it to go as badly as possible. After all, if Greece leaving goes pretty well, then other countries might be tempted to leave. And that raises the prospect of debt defaults, higher interest rates, and slowing European growth.
Once again, it’s in Europe’s interest to make things as hard as possible for Greece.
“Classic gunboat diplomacy”
Austerity turned the Greek debt crisis into a depression, but last month Medium’s Karl Whelan explained why the deeper issue is ugly and brutal:
This crisis is about more basic things: Debt and power. Indeed, the current stand-off looks a lot more like the classic gunboat diplomacy conflicts of the 19th century than it does the currency crises of the 20th century.
Whelan argues that the European Union should have let Greece default on those private loans, back at the start of the crisis. He ponders the media narratives for why the 2010 bailout happened – to rescue bankers, or to prevent contagion to other indebted nations – and concludes the real reason was something else:
My favourite theory, however, as to why European governments bailed out Greece is political hubris. European politicians were so sure the euro was a fantastic political success that a nasty event like a default was simply unthinkable for a euro area member state. If one euro area member state could default, the thinking went, surely this meant it could happen to others. So it needed to be stopped.
The strategy for responding to the Greek crisis of 2010 was largely formulated by the Eurogroup of finance ministers. Sadly, under the inept leadership of Jean-Claude Juncker (rewarded for his many failures with the European Commission presidency) this response was framed by populism and wishful thinking. Time and again, Europe’s politicians blamed the Greek crisis on nasty financial “speculators”.
At a distance of five years, this is obviously complete rubbish but this was what the official voice of European economic policy was saying at the time.
Simply, ‘pan-European’ leaders could not admit that the core problem was fiscal differential: big countries with solid economies (like Germany), feared a fiscal stimulus might set off inflation, yet small countries with struggling economies (like Greece) needed fiscal stimulus to stave off a deflationary death spiral.
I know many people will react to this piece by arguing that reckless, feckless Greeks are the real villains, cooking books and refusing to reform. Many will focus their anger on Syriza and point out that their election promises were undeliverable and ignored that the official creditors were never likely to be in the mood to offer significant debt write-downs or to get over their long-standing urge to micro-manage the Greek economy.
But these arguments focus on the smaller specific tactical issues of how the Greek debt problem evolved and how the the current negotiations are going. They ignore the fact that we have only arrived at this juncture because of the utterly flawed lending decisions of Europe’s governments.
While it is too much to expect these governments to put in place a sensible programme of the type proposed by former IMF official, Ashoka Mody, European citizens should expect their politicians to acknowledge there past mistakes and to accept that flawed lending decisions imply financial costs.
We’ll look at Mody’s and other proposed solutions tomorrow.