Why Syriza has no choice but to blink

Financial Mirror (Cyprus) - - FRONT PAGE -

Once again, Greece seems to have slipped the fi­nan­cial noose. By drawing on its hold­ings in an In­ter­na­tional Mon­e­tary Fund re­serve ac­count, it was able to re­pay EUR 750 mln – iron­i­cally to the IMF it­self – just as the pay­ment was fall­ing due.

This brinkman­ship is no ac­ci­dent. Since com­ing to power in Jan­uary, the Greek gov­ern­ment, led by Prime Min­is­ter Alexis Tsipras’s Syriza party, has be­lieved that the threat of de­fault – and thus of a fi­nan­cial cri­sis that might break up the euro – pro­vides ne­go­ti­at­ing lever­age to off­set Greece’s lack of eco­nomic and po­lit­i­cal power. Months later, Tsipras and his fi­nance min­is­ter, Ya­nis Varo­ufakis, an aca­demic ex­pert in game the­ory, still seem com­mit­ted to this view, de­spite the lack of any ev­i­dence to sup­port it.

But their cal­cu­la­tion is based on a false premise. Tsipras and Varo­ufakis as­sume that a de­fault would force Europe to choose be­tween just two al­ter­na­tives: ex­pel Greece from the eu­ro­zone or of­fer it un­con­di­tional debt re­lief. But the Euro­pean au­thor­i­ties have a third op­tion in the event of a Greek de­fault. In­stead of forc­ing a “Grexit,” the EU could trap Greece in­side the eu­ro­zone and starve it of money, then sim­ply sit back and watch the Tsipras gov­ern­ment’s do­mes­tic po­lit­i­cal sup­port col­lapse.

Such a siege strat­egy – wait­ing for Greece to run out of the money it needs to main­tain the nor­mal func­tions of gov­ern­ment – now looks like the EU’s most promis­ing tech­nique to break Greek re­sis­tance. It is likely to work be­cause the Greek gov­ern­ment finds it in­creas­ingly dif­fi­cult to scrape to­gether enough money to pay wages and pen­sions at the end of each month.

To do so, Varo­ufakis has been re­sort­ing to in­creas­ingly des­per­ate mea­sures, such as seiz­ing the cash in mu­nic­i­pal and hos­pi­tal bank ac­counts. The im­pli­ca­tion is that tax col­lec­tions have been so badly hit by the eco­nomic chaos since Jan­uary’s elec­tion that gov­ern­ment rev­enues are no longer suf­fi­cient to cover day-to-day costs. If this is true – no­body can say for sure be­cause of the un­re­li­a­bil­ity of Greek fi­nan­cial statis­tics (an­other of the EU au­thor­i­ties’ com­plaints) – the Greek gov­ern­ment’s ne­go­ti­at­ing strat­egy is doomed.

The Tsipras-Varo­ufakis strat­egy as­sumed that Greece could cred­i­bly threaten to de­fault, be­cause the gov­ern­ment, if forced to fol­low through, would still have more than enough money to pay for wages, pen­sions, and public ser­vices. That was a rea­son­able as­sump­tion back in Jan­uary. The gov­ern­ment had bud­geted for a large pri­mary sur­plus (which ex­cludes in­ter­est pay­ments), which was pro­jected at 4% of GDP.

If Greece had de­faulted in Jan­uary, this pri­mary sur­plus could (in the­ory) have been redi­rected from in­ter­est pay­ments to fi­nance the higher wages, pen­sions, and public spend­ing that Syriza had promised in its elec­tion cam­paign. Given this pos­si­bil­ity, Varo­ufakis may have be­lieved that he was mak­ing other EU fi­nance min­is­ters a gen­er­ous of­fer by propos­ing to cut the pri­mary sur­plus from 4% to 1% of GDP, rather than all the way to zero. If the EU re­fused, his im­plied threat was sim­ply to stop pay­ing in­ter­est and make the en­tire pri­mary sur­plus avail­able for ex­tra public spend­ing.

But what if the pri­mary sur­plus – the Greek gov­ern­ment’s trump card in its con­fronta­tional ne­go­ti­at­ing strat­egy – has now dis­ap­peared? In that case, the threat of de­fault is no longer cred­i­ble. With the pri­mary sur­plus gone, a de­fault would no longer per­mit Tsipras to ful­fill Syriza’s cam­paign prom­ises; on the con­trary, it would im­ply even big­ger cut­backs in wages, pen­sions, and public spend­ing than the “troika” – the Euro­pean Com­mis­sion, the Euro­pean Cen­tral Bank, and the IMF – is now de­mand­ing.

For the EU au­thor­i­ties, by con­trast, a Greek de­fault would now be much less prob­lem­atic than pre­vi­ously as­sumed. They no longer need to de­ter a de­fault by threat­en­ing Greece with ex­pul­sion from the euro. In­stead, the EU can now rely on the Greek gov­ern­ment it­self to pun­ish its peo­ple by fail­ing to pay wages and pen­sions and honor bank guar­an­tees.

Tsipras and Varo­ufakis should have seen this com­ing, be­cause the same thing hap­pened two years ago, when Cyprus, in the throes of a bank­ing cri­sis, at­tempted to defy the EU. The Cyprus ex­pe­ri­ence sug­gests that, with the cred­i­bil­ity of the gov­ern­ment’s de­fault threat in tat­ters, the EU is likely to force Greece to stay in the euro and put it through an Amer­i­can-style mu­nic­i­pal bank­ruptcy, like that of Detroit.

The legal and po­lit­i­cal mech­a­nisms for treat­ing Greece like a mu­nic­i­pal bank­ruptcy are clear. The Euro­pean treaties state un­equiv­o­cally that euro membership is ir­re­versible un­less a coun­try de­cides to exit not just from the sin­gle cur­rency but from the en­tire EU. That is also the po­lit­i­cal mes­sage that EU gov­ern­ments want to in­still in their own cit­i­zens and fi­nan­cial in­vestors.

If Greece de­faults, the EU will be legally jus­ti­fied and po­lit­i­cally mo­ti­vated to in­sist that the euro re­mains its only legal ten­der. Even if the Greek gov­ern­ment de­cides to pay wages and pen­sions by print­ing its own IOUs or “new drach­mas,” the Euro­pean Court of Jus­tice will rule that all do­mes­tic debts and bank de­posits must be re­paid in eu­ros. That, in turn, will force a de­fault against Greek cit­i­zens, as well as for­eign cred­i­tors, be­cause the gov­ern­ment will be un­able to hon­our the euro value of in­sured de­posits in Greek banks.

So a Greek de­fault within the euro, far from al­low­ing Syriza to hon­our its elec­tion prom­ises, would in­flict even greater aus­ter­ity on Greek vot­ers than they en­dured un­der the troika pro­gramme. At that point, the gov­ern­ment’s col­lapse would be­come in­evitable. In­stead of Greece ex­it­ing the eu­ro­zone, Syriza would exit the Greek gov­ern­ment. As soon as Tsipras re­alises that the rules of the game be­tween Greece and Europe have changed, his ca­pit­u­la­tion will be just a mat­ter of time.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.