mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Greeks Bearing Debts
The Markets Don’t Trust Syriza, Either

All eyes are on newly elected Greek PM Alex Tsipras’ high stakes negotiations with eurozone leaders this week. But the quarrel with the official lenders is not Tsipras’—or Greece’s—only problem, only its most immediate. As The Wall Street Journal reports:

By focusing on cutting political deals with the eurozone, he risks overlooking Greece’s real problem: its lack of access to markets. So long as investors continue to shun the Greek government, banks and companies, Mr. Tsipras has no chance of leading an economic revival, regardless of any restructuring of Greece’s debt.

Under the troika program, Greece had started to regain market access, following in the footsteps of Portugal and Ireland. Billions of euros flowed to the government and banks last year, raising hopes that Greece could exit the bailout this year, albeit with the safety net of a eurozone credit line.

The current political crisis has dashed those hopes for now. Mr. Tsipras demands the eurozone respect his electoral mandate, but his challenge is to win investors’ respect.

The best-case scenario for Greece in the event of a GREXIT calls for depreciation of the new drachma, followed by a rebound as the currency settles at a level that meets Greece’s economic realities. But all of that changes if investors have no confidence that Greece is a sane place to do business, whatever the price of its currency.

As we’ve said before, since Tsipras’ ascension to office, Syriza has been spinning, but nobody’s buying. That apparently includes the markets, which is a very bad omen for Greece’s future—in or out of the eurozone.

Features Icon
show comments
  • JR

    No such thing as bad assets, only bad prices. Greek assets at 50% or 40% of current valuations will make somebody say “Why not?”

    • Fat_Man

      Land under the control of ISIS? North Korea?

      Some times the price is negative. I.E., I will pay a lot of money to get away from this place.

      • Curious Mayhem

        Trash — take it away, please!

  • Fat_Man

    Regular TAI readers are sufficiently concerned with foreign affairs to enjoy reading those of George Friedman’s essays as he makes available to the general public. Two recent ones are particularly relevant to this issue and to the Ukraine problem:

    The New Drivers of Europe’s Geopolitics”
    January 27, 2015

    Two Versions of the Same Tale: The story is well known. The financial crisis of 2008, which began as a mortgage default issue in the United States, created a sovereign debt crisis in Europe. Some European countries were unable to make payment on bonds, and this threatened the European banking system. There had to be some sort of state intervention, but there was a fundamental disagreement about what problem had to be solved. Broadly speaking, there were two narratives.

    The German version, and the one that became the conventional view in Europe, is that the sovereign debt crisis is the result of irresponsible social policies in Greece, the country with the greatest debt problem. These troublesome policies included early retirement for government workers, excessive unemployment benefits and so on. Politicians had bought votes by squandering resources on social programs the country couldn’t afford, did not rigorously collect taxes and failed to promote hard work and industriousness. Therefore, the crisis that was threatening the banking system was rooted in the irresponsibility of the debtors.

    Another version, hardly heard in the early days but far more credible today, is that the crisis is the result of Germany’s irresponsibility. Germany, the fourth-largest economy in the world, exports the equivalent of about 50 percent of its gross domestic product because German consumers cannot support its oversized industrial output. The result is that Germany survives on an export surge. For Germany, the European Union — with its free-trade zone, the euro and regulations in Brussels — is a means for maintaining exports. The loans German banks made to countries such as Greece after 2009 were designed to maintain demand for its exports. The Germans knew the debts could not be repaid, but they wanted to kick the can down the road and avoid dealing with the fact that their export addiction could not be maintained.

    If you accept the German narrative, then the policies that must be followed are the ones that would force Greece to clean up its act. That means continuing to impose austerity on the Greeks. If the Greek narrative is correct, than the problem is with Germany. To end the crisis, Germany would have to curb its appetite for exports and shift Europe’s rules on trade, the valuation of the euro and regulation from Brussels while living within its means. This would mean reducing its exports to the free-trade zone that has an industry incapable of competing with Germany’s.

    Germany Emerges” February 10, 2015

    It is important to understand the twin problems confronting Germany. On the one hand, Germany is trying to hold the European Union together. On the other, it wants to make certain that Germany will not bear the burden of maintaining that unity. In Ukraine, Germany was an early supporter of the demonstrations that gave rise to the current government. I don’t think the Germans expected the Russian or U.S. responses, and they do not want to partake in any military reaction to Russia. At the same time, Germany does not want to back away from support for the government in Ukraine.

    There is a common contradiction inherent in German strategy. The Germans do not want to come across as assertive or threatening, yet they are taking positions that are both. In the European crisis, it is Germany that is most rigid not only on the Greek question but also on the general question of Southern Europe and its catastrophic unemployment situation. In Ukraine, Berlin supports Kiev and thus opposes the Russians but does not want to draw any obvious conclusions. The European crisis and the Ukrainian crisis are mirror images. In Europe, Germany is playing a leading but aggressive role. In Ukraine, it is playing a leading but conciliatory role. What is most important is that in both cases, Germany has been forced — more by circumstance than by policy — to play leading roles. This is not comfortable for Germany and certainly not for the rest of Europe.

    • Curious Mayhem

      Neither “narrative” (what a ridiculous word!) is correct, although they both contain elements of truth.

      The real problem was the inclusion in the Eurozone of countries that don’t belong there and never did. They need a euro at a value drastically lower than what Germany Is willing to accept. The “northern” countries (including Germany, but not limited to it) are just more productive than the peripheral ones (except for Ireland). In a common currency, it unavoidably leads to chronic imbalances in the system, on both sides. The more productive and better governed countries chronically produce surpluses, while the less productive and worse governed countries chronically produce deficits. The link between the two is that surpluses get lent back to fund deficits.

      Everyone knows that Greece can’t repay its debt in full, and that the austerity program only raises the debt/GDP ratio relentlessly. The program seems to be a make-believe where Greece undergoes endless contraction and is forced to keep up the pretense that it can repay.

      A Greek exit is inevitable — the sooner, the better. It will probably be forced on Greece by an ongoing and accelerating bank run, as well as the Greek government running out of money.

      • Tom

        Ireland, at least, had the excuse of being underdeveloped by the British for 400 years or so before independence.
        Nobody else in the PIIGS could say that.

        • Curious Mayhem

          Ha! I’m sympathetic to the Irish, who suffered from British oppression for several centuries, and I was very happy to see Ireland shake off its cultural and economic isolation in the 1980s and 90s.

          But Britain didn’t “underdevelop” Ireland — it was just geographically in the wrong place, well of the coast of the Continent. You see the same pattern in Britain itself, comparing the wealthier southeast with the rest of Britain. That pattern was interrupted by the Industrial Revolution for about a century, but the older pattern has since reasserted itself.

          It was the rise of cheap transportation and telecommunication, combined with the fact that the Irish speak English, that enabled the Irish Republic to develop in a new, post-industrial way.

          And it worked, for a generation. Unfortunately, Ireland joined the euro, got artificially low interest rates, and then saw massive buying and selling of real estate, driving a dramatic asset bubble.

          • Tom

            I hadn’t thought of the geography, but you have a point.

          • Curious Mayhem

            Not that I’m defending the historical attitude of the English, who looked down on the Irish as poor relations they didn’t want to think about.

    • Andrew Allison

      IMO, Friedman is mistaken on this topic. It is certainly true that Germany has a certain measure of guilt as a result of lending money to countries in order to enable them to buy its exports. Other countries, however, managed to survive the crisis. The simple fact is that the EU as a whole nodded-and-winked at the entirely fictitious financial reporting from Greece before and, until the inevitable default, after the country’s accession to the eurozone. Greece used EU borrowing in the same way that irresponsible homeowners used their homes as ATMs.

      • Curious Mayhem

        Yep. The embedded imbalances in the eurozone are not the result of one set of countries, or the other, but both together. Nonetheless, Greece is a case unto itself.

        The unique severity of the Greek crisis arose from the uniquely extreme lying that Greece engaged in to get into the eurozone and the extreme divergence between what it actually was and what it needed to be.

        All the eurozone countries had to fiddle with the requirements, even Germany. But Greece was and is an outlier, so extreme that it was bound to encounter crisis, severely, before everyone else. That’s not to say that other countries, including Frace, won’t also encounter severe crisis eventually — but that will be a slow-moving affair, building to a gradual climax. Not so Greece.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service