Greece sails into uncharted financial waters

Athens, Greece – Greece’s quest to declare a truce with its creditors is now focused on Monday’s Eurogroup, the single currency finance ministers’ council. For three weeks, Greece’s proposals for financing a debt payment hiatus have met with rebuttals.

Greece’s radical left-wing government, sworn in on January 28, has vowed to renegotiate a memorandum of austerity and reform policies its creditors oversee, saying it feeds a vicious cycle of falling jobs and living standards.

“Our proposal is this: Neither will we tear up the current programme, nor will [creditors] demand its blind implementation as if elections were never held,” Finance Minister Yanis Varoufakis told parliament during a debate leading to a vote of confidence last week, which the government carried along party lines.

Last Wednesday’s Eurogroup meeting broke down over the wording of a communiqué, which would have spoken of an extension of Greece’s current programme of fiscal oversight. 

“The new government has no right to ask for an extension of the memorandum, because it cannot ask for an extension of the mistake and the catastrophe,” Prime Minister Alexis Tsipras told parliament.

The ruling Syriza party has asked its creditors to fund a four-month negotiation by forgiving some of its debt, delaying repayment, or allowing the government to borrow from Greek banks. All these ideas have been rejected.

This is partly because most Greek debt is now in the hands of public bodies – Eurozone governments, the International Monetary Fund, and the European Central Bank (ECB) – none of which can countenance write-offs.

The ECB has also refused to buy up any more junk-rated Greek debt, effectively excluding Greece from its 1.2 trillion euro ($1.4 trillion) quantitative easing programme – though it did pump 5bn euros ($5.7bn) of liquidity into the Greek banking system this month.

A frustrated Greek finance ministry official declared last week, “A central bank tightening a rope around a country’s throat – it’s never happened before. We will bombard them with very reasonable, win-win positions, and if they want to kill us, so be it.”

“Killing” Greece would mean forcing it out of the Eurozone by permanently cutting off funding to the government and banking system.

Greece is already effectively living off home-grown tax revenue, since it cannot affordably borrow from markets. Its surplus cash last year, after public sector salaries had been paid and the underfunded pension system had been topped up, amounted to just under 2bn euros ($2.3bn) – nowhere near the 22bn euros ($25bn) it needs to service the debt this year.

This means unless there is a breakthrough with creditors soon, Greece will at some point be forced to issue them with an IOU, effectively inaugurating a national currency.

Syriza has put public finances further into doubt by announcing the abolition of an unpopular property tax and the reinstatement of a 12,000 euro tax exemption this year. This would deprive public coffers of more than 3.5bn euros, says Yiannis Siatras, head of the Greek Taxpayers’ Association.

“Will [the government] make up the shortfall by pursuing tax evasion? I rather doubt it,” says Siatras.

Was the old compromise so bad?

Syriza’s strategy of pronouncing the memorandum dead while promising to relax austerity has angered the conservatives, who shouldered the political cost of austerity for two-and-a-half years.

“I hope you will give us the chance to support whatever is to the country’s benefit,” former premier Antonis Samaras told Tsipras in parliament. “But we will not allow you to shipwreck the country – all the more so now that we’ve discovered you had no plan, no contact with reality.”  

Panagis Vourloumis is a former banker who oversaw the sale of the Hellenic Telecommunications Organisation to Deutsche Telekom a decade ago.

“The emphasis on the debt was deliberately misleading because [Syriza] wanted to avoid talking about reforms,” Vourloumis says. 

One of the main planks of Syriza’s platform has been the restoration of collective bargaining agreements and a minimum wage boost to 751 euros a month. It was reduced to 586 euros three years ago, sparking protests across the country. A finance ministry official said the reversal of the deregulation of labour “is one of our red lines”.

Vourloumis says this “outweighs all the reforms Syriza agrees with” because it would render the economy unattractive to investors.  

Another former banker and macroeconomics professor, Panayiotis Korliras, agrees. “No country ever repays its debt. You may reduce it a little; you may increase it. The question is to be able to finance it.”

Korliras says Greece’s creditors would have offered it lower interest rates and decades longer to repay the debt if Syriza hadn’t polarised voters.

Syriza argues that Greece cannot produce the enormous cash surpluses required to keep repaying the debt. Bleeding taxpayers also deters investment, it says, because that introduces social instability and the threat of even higher taxes.

Siatras agrees. Greek tax revenues grew during the crisis, from 32 percent of GDP to more than 36 percent, almost matching the Eurozone average. “However, this increase in tax revenue took place during a recession, when people’s income fell by about a third, and we had a rapid rise in unemployment. So the revenue came from much fewer taxpayers,” he says.

Regaining our sovereignty, our role as equal partners in European institutions, facing the humanitarian crisis, restoring our dignity, social justice ... are the main goals of this government of social salvation.

by Prime Minister Alexis Tsipras

Money as sovereignty

Greeks elected Syriza to keep Greece in the Eurozone on better terms, and recent polls suggest support for the new government has grown since the election. 

Three-quarters of Greeks polled by GPO for Mega Channel last week said they felt its strategy would produce a compromise, and 90 percent want the opposition to back it.

Tsipras captured national priorities in parliament. “Regaining our sovereignty, our role as equal partners in European institutions, facing the humanitarian crisis, restoring our dignity, social justice and the cultural renaissance of our country are the main goals of this government of social salvation,” he said.

Syriza, short for the Radical Left Coalition, has softened many of its positions over two years.

It has accepted balanced budgets as a cornerstone of self-reliance.

It has reversed support of civil disobedience and now asks people to pay their taxes.

It has abandoned the idea of nationalising the banking system to open the floodgates of cheap cash to the real economy.

And it has embraced foreign investment.

But it refuses to accept the humanitarian crisis that has plunged more than two million people below the poverty line, and it does not want the economy to be rebuilt on the back of cheap labour.

“The Greek people issued a strong mandate for the termination of this disastrous austerity … the notorious memorandum has been abolished first and foremost by its own failure,” Tsipras said.

The idea that debt and democracy are opposed was certainly shared by a rally of several thousand who gathered in Athens on Wednesday night.

“Besieged but Free” read one banner, a reference to the city of Messolonghi, which was famously crushed by an Ottoman expeditionary force during Greece’s War of Independence.

Another banner had just one word across it – Seisahtheia – a term coined by Athens’ ancient lawmaker Solon, who inflated the drachma to help the poor pay off private debt.

His reform also forbade creditors to enslave debtors or seize their land. In so doing, it helped create an Athenian middle class, and was the first in a series of reforms that established democracy.