The Greek situation is near incomprehensible. These posts are just me thinking out loud, sometimes in the hope that somebody wiser will chime in. (In this case, someone did! But where is the old SHWI crew? Insights wanted.)
To start, let me make my previous post clearer. It is not about the money: even a full default would net the Greeks only 0.7% of GDP per year in additional spending. This is the same number that Tom Warner calculated for the Greek primary surplus. (Go read the link.)
So the imbroglio is not about enabling a spending spree in 2015. There is no money for that. What then is it about?
I think of it this way: (1) What do the Greeks want? (2) Why do they need European cooperation to get it?
What do the Greeks want? Simple: they do not want to have to hit an impossible fiscal target in 2015 and beyond. Their economy has been absolutely crushed, much harder than Ireland or Portugal. And the Greeks have implemented more austerity. It is entirely reasonable for them to want to avoid sucking an additional 1.5% of GDP out of their economy over the rest of 2015.
Why can’t they get it without European cooperation? Two reasons. First, Greece doesn’t just owe interest this year. It has to make a whole lot of principal repayments. That debt needs to be rolled over or refinanced. Some of it is due the IMF, which might be cooperative; it was with Argentina in 2003. Some of it is due private creditors. That debt would be need to be restructured unless official finance was forthcoming. Mitu Gulati is the expert, and I have every intention of asking him his thoughts on the matter, but I think that should be doable.
And if neither refinance nor legal restructuring for private debt is an option, then Greece can just default. What are they the private holders of Greek bonds gonna do? Sue? Good luck with that.
But the IMF and private parties are not the main creditors: most of that money Greece’s public debt is owed to the European Union in one way or another. So Greece would need to get the Europeans (read: Germany) to agree to a rollover.
Why not just default on the Europeans? Well, here is the second reason the Greeks need European cooperation: Greek banks depend on special finance from the ECB. Pull that, and the Greek banking system collapses.
The question seems to be, then, would the Europeans actually send Greece spiraling into another depression, even before the country emerged from the last one? I was extremely doubtful a month ago. My opinion is changing, however. Not because the Germans are proving more intransigent than I expected. Rather, the center-right governments of Portugal, Ireland and Spain are proving more intransigent than I expected. In the words of Noel Whelan: “Centre-right governments have no interest in seeing this new left-wing Greek government succeed.”
Whelan argues mostly for Ireland (it is worth reading) but the logic applies to Portugal and certainly to Spain, where both the People’s Party and the Socialists have an interest in heading off the rise of Podemos.
That said, I still think this will be resolved with a haircut and without Grexit. Here is the French finance minister, Michel Sapin: “It is a problem of wording, although the legal tool cannot be anything else than an extension of the program. What [Greek finance Minister Yanis] Varoufakis has told us, what I have understood, is that he agrees in principle with the extension of the program. Everyone agrees on this: you have a 1.5 percent primary surplus, you cannot do anything in this period that worsens that surplus.” There are also some pro-Greek noises coming from the Italian finance minister, Pier Carlo Padoan.
If the Europeans can agree to call a violation of the bailout program a new program, rather than insisting that it be called an extension, then everyone should be able to strike a deal.
Unless J.H. is right.