Can the Greek Debt Deal Last?
Financial Times writer Wolfgang Münchau believes the deal ends in failure. So do I. Münchau provides some well-thought-out reasons in Grexit Remains the Likely Outcome of this Sorry Process.
Alexis Tsipras should never have hired Yanis Varoufakis as his finance minister. Or he should have listened to him, and kept him on. But instead the Greek prime minister chose the worst of all options. He followed Mr Varoufakis’ advice of rejecting the offer of the creditors — until last week.
The economic precondition for a smooth departure would have been a primary surplus — before debt service — and an equivalent surplus in the private sector. If the Greeks were to reintroduce the drachma, they would have had to pay for all of their imports with the foreign exchange earnings of their exports. These minimum preconditions were in place in March but not in July.
[Mish Comment: Münchau is mistaken about Greece having a primary account surplus in March, but he is correct in that a primary account surplus is a necessary precondition to default but stay on the euro].
So, like his predecessors, Mr Tsipras ended up with another very lousy bailout deal. And this one suffers from the same fundamental flaws as its predecessors. This leads me to conclude that Grexit remains the most likely ultimate outcome after all.
My hunch is that they will ultimately fudge a deal, but that will come — as it always does — with overwhelming collateral damage: less debt relief than needed, and more austerity than Greece can bear.
Donald Tusk, the president of the European Council, hinted at this in his interview with the Financial Times last week when he said that he felt “something revolutionary” in the air. He is on to something. The most probable scenario for me is Grexit through insurrection. Give it another three years, and I would not be surprised to see Mr Tusk and his colleagues in the European Council having to entertain even more drastic action to quell a crisis.
Greece is not quite at the point of insurrection yet — despite eight years of recession. Opinion polls still reflect a majority of the people in favour of keeping the euro. In real life people choose between a small number of political alternatives and settle for the one they think works best for the economy. They voted for Mr Tsipras and his Syriza party in January because the other parties failed to deliver. If Syriza fails to deliver, too, as it surely will, the Greeks will have no democratic choices left.
Primary Account Surplus Revisited
I have written about the need for a primary account surplus many times. Here are the two most recent ones.
- February 11: Third Greek Bailout? Another €53.8 Billion Needed? Primary Account Surplus Revisited
- June 11: IMF Walks Out of Greece Talks; “No More Space for Gambling”; Can Greece Default and Stay in Eurozone?
Germany “May” consider Debt Relief
The BBC reports that at some unknown point in the future Germany ‘May Consider’ Debt Relief
German Chancellor Angela Merkel says she is prepared to consider further debt concessions to Greece once its latest economic reforms are worked out.
In a television interview, she said she was open to discussing reduced interest rates and extended maturity dates.
But Mrs Merkel said this would happen only after details of the latest bailout had been agreed, and reiterated that there would be no debt write-off.
“Greece has already been given relief. We had a voluntary haircut among the private creditors and we then extended maturities once and reduced interest rates,” she said in an interview with ARD TV to be broadcast later on Sunday.
“And we can now talk about such possibilities again… once the first successful review of the programme to be negotiated has been completed, then exactly this question will be discussed – not now, but then,” she said.
Image courtesy of the Green Carrot Company.
Not Now, Then
For starters, reduced interest rates and extended maturity carrots are indeed a form of debt write-off. Merkel knows that, she just cannot say so because debt haircuts and write-offs are illegal under ECB rules.
When might these haircut carrots come? The answer is after she is out of office, on someone else’s watch. She cannot say that either.
Mike “Mish” Shedlock