The Greek drama has entered its endgame. The Greek government
has to repay loans to the IMF and other public institutions in the near future
but does not have the cash to so. The lenders refuse to come forward in
providing liquidity as long as the Greek government does not accept the
conditions they impose.
We now hear from the finance ministers that the Greek
government is unreasonable because it does not want to accept these conditions.
These are that austerity be fully implemented and that the structural reforms
that have been agreed to by the previous Greek government, be fully carried
out.
But are these conditions reasonable?
The austerity measures that were imposed since 2011 led to devastating
effects on the Greek economy. They drove millions of people into unemployment
and poverty, and produced intense political instability that is responsible for
the rise of Syriza. Insisting on further austerity does not seem reasonable
when the failures of this strategy have become so obvious. The surprising thing
is that ministers of finance continue to hold the moral high ground and preach
to the Greek that they should be more reasonable. Being reasonable is equated
to accepting the conditions of the creditors even if these conditions have
failed to produce positive results. It is even more surprising that most of the
media have now accepted this story.
Some of the structural reforms the creditors insist on are
badly needed. Tax reform that would lead the rich to pay taxes, is one. But
surely this is a reform that the Tsipras government, in contrast to the
previous government, is willing to introduce. But other structural reforms are patently
unreasonable. The privatization program that was agreed with the previous
government and that the creditor nations insist should be implemented does not
make sense. A country should not be pushed into disposing of its valuable
assets in a forced fire sale. This will lead to very low revenues for the Greek
government and will mainly profit the buyers, some of which are companies in
the creditor nations.
We are now being told that the responsibility for failure
rests entirely with the Greek government that remains unreasonable and
unreliable. It is exactly the opposite. The intransigence of the lenders and
the unreasonable demands they impose on a country are responsible for the drama
that unfolds.
There is a big contradiction in this intransigence. As is well
known, Greece has profited from debt rescheduling in the recent past.
Maturities on the debt were extended and interest rates were lowered. According
to the Brussels think tank, Bruegel, the effective Greek public debt represents
only about 60% of Greek GDP. This appears to be sustainable, provided the Greek
economy can function normally. Put differently, Greece can be said to be
solvent but illiquid.
The lenders, however, keep the money tap closed. As a result, financial
markets are now speculating that the Greek government will not be able to
respect the next repayment deadline and will be forced to go into default. The
interest rates on Greek government bonds have shot up to levels that make the
debt service unsustainable and that make it impossible for the Greek government
to refinance itself in the bond market. Speculation has become self-fulfilling
and is driving the Greek government into default. But note that this is the
outcome of the decision of the creditors not to provide liquidity to the Greek
government. It is precisely because the lenders do not want to provide
liquidity that Greece may be forced to default. It looks like the creditors are pushing Greece
deliberately into default.
The ECB is carrying a great responsibility. By providing liquidity it could unlock the
stranglehold the Greek government is kept in. Refusing to provide liquidity would
make the ECB the single most important actor responsible for a Greek default
and a possible Grexit.
