Original post from Washington Post
The IMF could have handled its 2010 bailout of Greece quite a bit better, a staff review found. (AFP PHOTO / LOUISA GOULIAMAKILOUISA)
Okay, campers, rise and shine, and don’t forget your booties because it’s cold out there between Greece and Europe. It’s cold out there every day. Greece is tired of being told what to do, and Europe is tired of giving money to a country that won’t do as it’s told.
If that sounds like the same story you’ve been hearing for five years now, well, you’re right. It’s a financial Groundhog Day that not only threatens to kick Greece out of the eurozone, but also kick out others if the panic spreads. The problem is that even though both sides want a deal, neither wants the other to be able to say that they got the better of it. Specifically, Greece’s new ruling party, Syriza, wants to be able to show that confrontation has worked, but Europe doesn’t want other countries to think that’s the way to get what they want.
And so on and on it’s gone—until now maybe. Not because Europe and Greece are closer to agreement, but because they’re not. After all these years, Greece doesn’t really think Europe would hit the eject button on it, but, at this point, Europe doesn’t think anyone but Greece would get hurt if it did.
The eurozone’s Groundhog Day, in other words, might be giving way to its Judgment Day.
Up until now, it’d been hard for them to do that. Greece needed Europe’s money, and Europe needed to keep Greece in the euro. Neither side liked where that left them, but they didn’t have many choices. Now, Greece could have defaulted and devalued, but that would have not only meant leaving the euro, which its people didn’t want, but also even worse austerity in the short-term than it was already doing. That’s because Greece’s deficit not including its interest payments was so big that even if it didn’t have any interest payments to make—that is, it defaulted on its debt—then, because it would have had to balance its budget overnight, it would have had to cut more spending than it did as part of its bailout. Europe, meanwhile, could have let Greece go bust, but that could have brought down the French and German banks that had lent to it—and who knows how many others—and made markets worry that other countries would be next.
So what has changed? Well, for one, Greece has gone through a Great Depression that has made its economy shrink 25 percent and its budget cuts self-defeating. Consider this: since 2008, Greece’s debt burden has grown more because its smaller economy means it has less ability to pay, not because its bigger debt means it has more to pay. That’s made the Greek government finally say enough. Enough austerity that’s made it harder to grow and impossible to pay back what we owe. And enough telling us how to run our economy. It’s as much about reclaiming a sense of sovereignty as anything else. The only upside to all this austerity is that, before this latest flare-up, it had pushed Greece’s budget into the black if you ignored its debt payments. That meant if it did default and exit the euro, Greece might not have to do more austerity than it’s already doing (although the tricky thing is that this would hurt its economy enough in the short-term that its surplus would turn to a deficit). In any case, Greece thought this made their threats to leave the euro more credible—which, assuming Europe would do anything to avoid that, would give Greece more power at the negotiating table.
That might not be a safe assumption. That’s because it might not be the end of the world if Greece defaulted now, and it might not even be the end of Greece’s euro membership. Instead, it could put capital controls in place—preventing people from pulling their money out of the country—and continue as a once and future part of the euro, like Cyprus has. But even if it didn’t, it wouldn’t be as catastrophic as it would have been a few years ago. Greece’s first bailout paid off most of its private creditors, those French and German banks, so there wouldn’t be the same kind of financial contagion now as before. There might not be any kind of contagion at all. The European Central Bank has promised to buy a country’s bonds in unlimited amounts if necessary, and has already started buying €60 billion a month for the eurozone as a whole. That, in theory, should keep other country’s borrowing costs from spiraling up in a self-fulfilling cycle of doom if Greece goes bust.
That’s set up a showdown both sides think they can win over Greece’s budget, Greece’s debt, and Greece’s labor laws. It’s pretty simple. Greece doesn’t want to have to do any more austerity—especially when it comes to its pensions—it wants its debt to be written down, and it doesn’t want to change its laws to make it easier to fire people. Europe, for the most part, wants the opposite. Now, it’s true that Europe has been willing to offer Greece a little wiggle room on its budget targets, but that’s about the least it can do. It’s just acknowledging economic reality. That’s because every 1 percent of gross domestic product of cuts costs Greece, as Paul Krugman points out, more than twice that much in GDP itself.
Other than that, though, Europe has been holding the line. It doesn’t want to give Greece money without feeling like it’s getting something in return, and that something is bringing Greece’s rules in line with Germany’s. That means cutting Greece’s pensions even more. It means getting rid of Greece’s labor laws that protect people who already have jobs at the expense of people who are looking for them. And it means selling off assets that the state doesn’t need to own. Greece’s response is that it’s already cut its pensions quite a bit(even if they’re still pretty generous), and it’s up to them to decide what the right rules are for its labor markets. And Greece says that forcing it to sell things, like the Piraeus Port, will only make it sell them at fire sale prices, transferring public wealth into private hands at below-market prices. But more than that, Greece is saying that it can’t do this politically. Maybe that’s just a negotiating tactic, but maybe it’s not. Syriza’s far-left members don’t want to be the party of less austerity. They want to be the party of noausterity. And that’s why Syriza has backtracked on reforms that previous Greek governments had made by, for example, rehiring thousands of government workers.
Now anytime you read a headline about Greece, you should remember that there’s not going to be a deal until the last minute. The question, though, is whether there will be one after it. European officials, for their part, don’t sound so optimistic now, but then again, why would you expect them to say anything else? It’s all about putting pressure on the other side to give in before the deadline at the end of the month. And not just with words, but with carrots and sticks. Europe’s been pretty clever about those, what good it’s done. The first is the European Central Bank’s bond-buying program. The rules it’s given itself prevent it from buying Greece’s bonds until or unless Greece pays the ECB back some of what it already owes. And the second is the new bailout Europe is proposing. The money would come from the money they’d already set aside, but haven’t used yet, for recapitalizing Greece’s banks. The catch? Every day there isn’t a deal, Greece’s slow-mo bank run, a jog, really, gets a little worse—people don’t want their euros to turn into drachmas if Greece does leave the euro—and there’s less money in the bailout fund for bailing out anything other than the banks. The message is clear: take the money now so you can pay back what you owe, or wait and have less money.
Will this work? Probably. But for the first time in a long time, there’s a chance that this bailout dance, where each side ritually denounces the other before agreeing to some kind of fudge, has reached its end. You might miss Groundhog Day when it ends.
Matt O’Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic. ……’