Is Greece an offender or a victim?
No matter who is on which side of the debate, a default must be avoided
The Greek debt drama continues with a considerable dose of political rhetoric. Alexis Tsipras, the Greek prime minister who was elected to office in January this year on an anti-austerity plank and a promise to renegotiate the bailout package with lenders, has reported to have accused the International Monetary Fund (IMF) of “criminal responsibility" for the current state of Greece. The country has to pay back €1.5 billion to the IMF by the end of this month, which will not be possible if fresh bailout money is not released. An agreement, which will unlock funds, has not been reached so far because the Greek government is unwilling to raise taxes and cut expenditure, as demanded by its lenders.
There have been arguments and counter arguments from both sides. Briefly, the lenders argue that economic reforms and austerity are necessary to bring Greece back on track, while the Greek government’s argument is that it wants to implement reforms but the demanded pace is hurting its economy and its people. “Greece’s creditors insist on even greater austerity for this year and beyond—an approach that would impede recovery, obstruct growth, worsen the debt-deflationary cycle, and, in the end, erode Greeks’ willingness and ability to see through the reform agenda that the country so desperately needs. Our government cannot—and will not—accept a cure that has proven itself over five long years to be worse than the disease," argued Yanis Varoufakis, the Greek finance minister, in a column on Project Syndicate. (See: Austerity Is the Only Deal-Breaker, 25 May.)
Varoufakis is also upset with the way international media is covering the issue and quoted a Financial Times column by Philip Stephens to highlight this. Stephens had noted that the rest of the euro zone is of the view that Greece is unable and unwilling to implement economic reforms. The column further noted, “…The problem is not so much the debt, nor even the pace of deficit reduction, but Syriza’s (the political party that Tsipras represents) refusal to embark on reform of the state. The words most often spoken to describe governance in Greece are clientelism, corruption, rent-seeking, special interests and favouritism. Without radical overhaul of the nation’s political and administrative capacity, no economic programme can work." (See: How politics will seal the fate of Greece, 21 May.)
These arguments reinforce the general impression that fault lines of the crisis are in Athens. However, the Greek narrative also has intellectual support. “The folly of continuing to pursue this program is particularly acute now, given the 25% decline in GDP (gross domestic product) that Greece has endured since the beginning of the crisis. The troika badly misjudged the macroeconomic effects of the program that they imposed… Greece’s voters were right to demand a change in course, and their government is right to refuse to sign on to a deeply flawed program," said Nobel laureate Joseph Stiglitz in his 5 June column on Project Syndicate. (See: Europe’s Last Act?) So, is Greece a victim of harsh conditions being imposed by the rest of the union and the IMF or an offender for not doing enough? A brief view of history will help. Greece joined the currency union in 2001, but it was discovered that the Greek government had been understating its deficit and debt numbers. As interest rates converged with the rest of the union, it went on a spending spree, and failed to use the membership to its advantage. It is now saddled with a broken economy and debt close to 180% of GDP.
Meanwhile, financial markets across the world gained this week on hopes that an agreement may finally be reached. The source for this enthusiasm is that Greek authorities have come up with a fresh plan that could potentially unlock the funding and avert default. While the financial markets have taken the proposals positively, experts have pointed out that this may not be sufficient to convince lenders. Also, the political opposition to proposals is rising in Greece. So it’s not a done deal yet.
There are two possibilities. First, that a last minute compromise is reached between the Greek government and its lenders and Greece lives to fight another day. But the Greek issue will continue to haunt the global financial markets as Greece has to make a series of payments this year and it remains to be seen how much Tsipras will be willing to climb down from the promises made to the electorate.
The second possibility is that both sides fail to reach a compromise, which means Greece will default and be forced out of the single currency union. A default will be a disaster for Greece. There will be run on banks and economic activity will collapse. It may also not be able to access emergency funds from the IMF and the new currency may not find takers due to lack of market confidence. Therefore, it can be argued that the onus is on Greece to show flexibility and avoid the impending default.
However, a Greek default will also significantly erode faith in the single currency union and its ability to stick together in difficult times with long-term consequences. The rest of the world also stands to lose because of the collateral damage that a Greek default will inflict on the global financial system. Therefore, no matter who is on which side of the debate, a default must be avoided. It is being argued that the impact on rest of the world will be limited, but decision makers and markets should be careful. Some people had similar views about Lehman in 2008.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!