So Now What? Syriza’s Victory and the Quest for Debt Relief

A strange discussion has followed on the heels of Syriza’s election victory on Sunday evening. Several clever economists and observers – some with ideological leanings to the left, others not – are excited about Tsipras or the new government, and think there is a good chance to fundamentally re-constitute the financial relation between Greece and its creditors, including substantial debt relief coupled with a sharp reduction in the mandated primary fiscal surplus for Greece..

Here are some random comments about all this.

1. I think there is a chance that there will be some smaller changes made in Greece’s debt agreements with Eurozone creditors. However, I don’t think such changes would be substantial – and the realistic amendments of the debt accords are far away from the position taken by Syriza. Eurozone leaders have already pledged, in a summit declaration from 2012, that further improvements can me made when Greece has shown it has achieved a sustained primary fiscal surplus. So it is time for such talks. However, the expectations should be moderate – an extension of the repayment terms and some cuts in the interest rate that Greece should pay some of its creditors.

2. I find the idea of a nominal haircut or a cut in the principal to be unrealistic. I favoured such a move ahead of the previous debt restructurings, and I think Greece’s current effective debt is not sustainable under the current terms for debt consolidation in the EU. Now, however, the situation is different. Greece’s debt has been socialised – it has been taken over by other governments or official entities. Greece’s debt could in theory still be written off, but not without serious consequences for the stability of the Eurozone, its crisis mechanisms, and political cohesion in the EU.

3. A moderate change in Greece’s debt position, the one that I expect, will not come without strings attached, especially under a Syriza government with an economic reform programme that will lower the country’s growth potential. There is a dilemma for the new Greek government: whatever improvement it can negotiate in its debt repayment/service terms will have consequences for its ability to pursue the economic agenda it has set out. The conditions that would follow on a renegotiation of the debt terms will contradict the key election message of Syriza, which is to get back Greece’s economic sovereignty and shift general economic policy in an anti-austerity direction, with a focus on expanding government expenditures. The deal that Alexis Tsipras can get, will undermine this pledge.

4. While people expect the big opponent to a big debt haircut for Greece to be Germany, conversations I have had in the past month with officials in Paris, Rome, Madrid and other capitals suggest to me that no country is willing to turn in Tsipras direction. Several governments rightly fear that such a move would empower populists on the left and the right in their own countries. They also understand that a larger accord to write off debt in Eurozone countries with debt problems (or previously in an official programme of assistance) is political dynamite. So the question facing countries sympathetic to Greece’s demands of another debt restructuring is: what can their governments get away with at home without fuelling their insurgent parties? The answer I am hearing is that there can be some changes – but only at the margin.

5. I don’t expect there will be rapid developments in renegotiating the fiscal relation between Greece and the EU. Greece still needs to conclude it current bailout programme, and will have to find an agreement with its euro partners that will allow the final disbursement of assistance under that programme. It should want to negotiate an agreement that could give the country some “crutches” that can help it to stay on track after the bailout programme has ended. It needs to get a durable agreement with the ECB on the terms for ELA to Greek banks. Furthermore, the new government will not face a market environment supportive of the new government and its demands. Tsipras will try to move quickly to use the political windfall from his victory, but the urgent demands will take priority over the medium-term demands. That will not work to his favour.

6. Greece’s best bargaining chip is the risk of default and a Greek departure from the euro, a so-called Grexit. Tsipras can’t use such threats openly, however. It is economically risky because it would push the economy back into an urgent funding crisis. It is politically risky because the Greek electorate is solidly in favour of remaining in the Eurozone. If Tsipras cannot generate political conditions for debt talks that help to concentrate minds, make the Greek situation unique in comparison to other euro countries with problems of debt overhang, and contain a big element of political and economic threats for the euro unless other countries move in Syriza’s direction (e.g. Grexit) – then I can’t see a scenario that would lead to a deal beyond marginal changes.

7. A Greece after a small or a big change in its debt position would still be a country in economic problems. The country has still a good way to go until it has reached an economic position that is compatible with continued euro membership. Much of the heavy lifting in reforming the state has yet to be done. Problems of corruption and political patronage remain. The tax system and the efficiency in collecting taxes have to improve radically. Many sectors and professions remain protected from competition. If Tsipras economic agenda is pursued, some of the economic problems will be reinforced. And Tsipras represents the right wing of his party coalition. If he can’t stand his ground in the party, he will have to give way for those forces in his party that either favours greater economic nationalism or economic socialism.

8. I still don’t see a realistic way forward for Greece under continued euro membership. The conditions for a Greece that can economically recover and move to sustained positive growth, while still remaining in the Eurozone, have not improved after the election.