Since Greece’s Syriza party came to power, things have been tense in the euro zone. The party’s anti-austerity, anti-bail-out platform has put it on a collision course with its benefactors, especially Germany, which has footed a big chunk of the bill to keep the single currency together.
Greece is currently playing a game of chicken with Germany, the EU, the European Central Bank, and others. Many think that its creditors will cave.
But there is another way of looking at it: This is a fight that Greece will lose, for three reasons.
While its appeal to the Greek electorate was clear, what Syriza wants from the rest of Europe keeps shifting. Greece’s new finance minister, Yanis Varoufakis, is on a tour of European capitals to raise support for his plans for a “new contract” for Greece, his headline demand being a call to write off a huge part of the total debt that Greece owes.
Varoufakis first said he refused to talk with the “troika”—the European Commission, the European Central Bank, and the International Monetary Fund—which has bailed Greece out to the tune of €240 billion ($272 billion) since 2010. That was then finessed to mean only the auditors who come to Greece to monitor the implementation of the bail-out. So, Greece will indeed speak to the EU, ECB, and IMF individually, it seems.
Then, the finance minister’s vow not to negotiate over an extension to the current bail-out program panicked markets and pushed Greece’s prime minister, Alexis Tspiras, to dial back the rhetoric even further over the weekend—he vowed to pay back the IMF and ECB and reach a “mutually beneficial” deal with the rest of the EU.
Finally, after meeting his British counterpart in London yesterday, Varoufakis said he longer wants a “haircut” for Greece’s debt. He now wants to swap current debt for growth-linked and long-dated bonds (paywall) and in return pledges to raise money by cracking down on tax evaders—something everyone can agree on.
Syriza was in power for about a week when it gave up on its number-one demand.
Greece currently owes creditors around €315 billion—or around 175% of its GDP. Much of that debt is to the rest of Europe now after two bail-outs, the last of which expires at the end of this month. There is one tranche of bail-out funds still to be delivered by the troika, worth €7.2 billion, and Varoufakis said he doesn’t want it.
But Greek banks are on life support provided by the ECB. The central bank gives Greek banks emergency loans, taking Greek government debt as collateral. But since Greek debt is rated as junk, the banks need a special exemption to pledge these bonds as collateral to the risk-averse ECB. If Greece exits a troika-administered bail-out program, it no longer qualifies for special treatment and the banks are cut loose. Syriza’s moves to curb privatizations and raise the minimum wage are tough to square with the troika’s austerity-heavy demands.
If Greece’s government and banks are cut off from bail-out funding at the end of this month, estimates vary for how long they could finance themselves on their own. Some say March, some June, and Varoufakis has set May as his deadline to reach a deal with creditors.
Regardless, time is running out. Greek banks reportedly lost 7% of their deposits in January alone. If Greece fails to secure more funds and its banks are cut off by the ECB, the government would be forced to nationalize the banks and roll over the resulting debts in the open market at costs much higher than the 10% that its 10-year bonds currently fetch. That would probably bring about a return the drachma, devaluation, and default.
Balancing its soaring borrowing costs with the meager tax receipts of a shattered economy would entail even more austerity for the people of Greece, not less as Syriza promised. The new government wants to avoid this nightmare scenario more than the rest of the euro zone—and its partners know it.
Varoufakis is a respected economist and has written a book on game theory. But he’s now playing in the world of realpolitik. German chancellor Angela Merkel rose from obscurity in East Germany to the most powerful woman in the world, along the way outmanoeuvring Helmut Kohl, Germany’s most powerful post-war chancellor, with the kind of ruthless guile she has shown ever since.
Merkel has overseen six bail-outs in the euro zone, including two for Greece, and outlasted many a European government over this time. She has managed to win three terms in office despite Germans footing huge costs to keep the currency bloc together. She has an acute understanding of what people at home and abroad will tolerate, and what is politically possible.
After a week of Varoufakis talking, Merkel cooly dismissed any chance of a debt writedown. She is refusing to meet with Tsipras directly—her goal is to isolate him, German officials have told Bloomberg— and there is currently no trip to Berlin planned for Varoufakis, a telling omission.
Syriza may have won a big election victory at home but politics at the European level requires gamesmanship of the highest order. Tsipras and Varoufakis have never done this before, and their prevaricating over the past week shows it.
For all their tough talk, there is little chance of them winning most of the concessions they promised the Greek people. Their ultimate threat of leaving the euro is not enough—Merkel has hinted her reforms of the euro zone mean that a “Grexit” would no longer cause the entire euro zone to break apart. This may be bluster and brinskmanship, but the Germans, in the words of the country’s finance minister, are “averse to blackmail” and know how to reply.
In the end, the Greeks will walk themselves to the precipice. Then walk themselves back.