Time To Write Off Some Of Greece's Debts
It was off the radar screen for some time but it looks to return with a vengeance this summer: the Greek Question about debt relief. Pressure is on eurozone nations to finally write off some of the debt Athens owes them but cannot easily pay back.
"We will get every cent back, with interest."
That is what German Chancellor Angela Merkel and other heads of state of northern eurozone countries promised their voters when they loaned money to Greece.
The Greeks then used that money to pay off loans to German and Northern European banks, so as to prevent a so-called credit event -- a default -- that would have reverberated throughout Europe, potentially causing the collapse of Southern European banks and economies.
This July, some of the emergency loans made to Greece by the so-called troika -- the International Monetary Fund, the European Central Bank, and the European Commission -- need to be be renewed or paid off. In recent days, details leaked of a telephone conference of top IMF officials during which the participants discussed walking out of the arrangement unless eurozone creditors (who really call the shots) agree to a debt write-off.
A write-off in any form is unpalatable to most eurozone leaders -- if not for financial reasons, then for political ones. As said, heads of state at the time sold the bail-outs to Greece to their voters on the promise that the debtors in Athens would pay it all back.
With severe voter unrest swirling about the refugee crisis, seen by many as a problem exacerbated by the European Union, and a referendum looming in Great Britain on the topic of continued EU membership, the last thing these heads of state now want is to have to renege on their promises.
The sensible choice
Yet a write-off is the sensible thing to do. Unhelpfully to European politicians, their American ally agrees and is pushing them to make the logical decision. Other figures such as eurogroup chairman Jeroen Dijsselbloem -- also Finance Minister for the Netherlands -- think along the same lines.
Recently Dijsselbloem was heard telling a European Commissioner after a press conference that a debt relief debate among eurozone nations was necessary.
Dijsselbloem thus seemed to be walking back positions he and previous Dutch Finance ministers have taken that echoed the tough "every cent back" line.
Dijsselbloem is currently in what is widely seen as his last tour of duty as eurogroup chairman. At home in the Netherlands, polls show that Dijsselbloem's center-left party, which is part of the ruling coalition, is destined to lose the upcoming 2017 elections by record numbers. A renewed stint as Finance Minister therefore seems highly unlikely. As such, he no longer has much to lose.
It is true that Greece is largely responsible for many of its financial troubles. They began in 2009 and 2010, when it turned out that previous Greek governments had cooked the books, purposely inflating economic fundamentals in the manipulated statistics it provided to the world.
Filling a hole with another hole
Banks in Greece and the government itself had taken on loans from European financial institutions. When the fantasy bubble burst, it became clear that Greece was in the tank for more than it could hope to repay.
As the saying goes: When you owe $5000 to your bank, you have a problem. But when you owe the bank $500 million, the bank has a problem.
And so it was with Greece's lenders. The fear was that a Greek default would lead to not just the collapse of some banks, but to international contagion.
Lenders would take a second look at their loans to Italian, Spanish, Portuguese, and Irish banks and governments, quite possibly resulting in a string of collapses and national defaults. As these banks and their governments had taken on large loans from banks in Northern Europe, troubles would soon spread to northern eurozone countries.
With the world sorting through the fallout of the credit crisis, a much worse economic crash was in the cards in such an event. Greece therefore had to be prevented from crashing.
So eurozone nations got together and handed Greece loans under harsh conditions -- loans which Greece had to use to pay off its debts. The Greek debt problem became a problem not of foreign banks, but of foreign governments.
Some debt relief
Over the past years, Greece has paid dearly for its profligacy. Government programs have been cut severely. Poverty has shot up. The country has suffered immensely. Yes, on some levels reforms demanded by Greece's creditors still have to be executed. Yet a renewed and further crackdown on pensions could push Greece over the cliff.
There are those in Northern European governments who could not care less about what happens to Greece: The risk of contagion has subsided, and they would like to give Greece that extra push.
Yet this would serve no purpose but show to the few supporters of the European Idea that the eurozone consists of a bunch of loansharks chasing their own national interests; like a bunch of well-to-doers beating up a homeless person on the street.
It is time to show some spine and offer Greece some conditional debt relief. With a concerted communications strategy to voters at a time of rock-bottom interest rates, it is the sensible thing to do.
Oh. And "debt relief" means just that: writing off debt. Not extending loans against zero-bound interest. That's just kicking the can further down the road.