Greece: it's not about the debt

(This is an unedited version of my Sunday Business Post column from the 1st of February).

The media have exhausted every possible Greek cliché and trope, and are now spilling into Roman ones as the crisis rumbles on. We’re told the Greek government is crossing the Rubicon when it announces that, for it, the bailout is over. The President of the Eurogroup, Jeroen Dijsselbloem, has held talks with the newly elected Greek government this week to discuss the approach Greece will take to dealing with its creditors.

I think the Greek negotiating position is very strong because Syriza has committed to acting irresponsibly, from the point of view of the markets, but wisely said it wishes to remain in the Eurozone while dealing constructively with their sovereign debt problems. The stage is set for a serious negotiation.

Other economies, like Ireland and Spain, will feel cheated if Greece escapes further austerity. Key creditors like Germany and Finland are opposed, at least in public, to any restructuring. Privately, I hope they can see no other way is possible given the situation on the ground. Greece has done enough. Further austerity will drive Greece into choosing a political solution so extreme that only leaving the Euro will suffice. No one wants that.

The Troika negotiators know the Greek economy is very weak. Upcoming issues like 2015’s bank stress tests, the key problem of unpaid taxes, lack of implementation of Troika-mandated structural reforms and a relatively stagnant export sector mean solid growth is less and less likely. One protracted period of irresponsible behaviour by the European authorities in the coming months, and all is lost.

Greece has about 2 and a half months worth of bailout money left, and its banks are suffering from large withdrawals by depositors, and the markets are extremely worried about a collapse of system. While not a full blown bank run yet, there is enough deposit flight to worry the Greek establishment and the international markets, pushing the price of Greek sovereign debt up more than 15% this week.

Greece has endured enormous austerity since 2009. From 2009 to 2013 it shrank its general government deficit by nearly 14% of GDP, beating their target for 2013 by nearly 2% of GDP. When you adjust for the business cycle, the adjustment Greece has made to its primary balance is around 16%. Ireland’s adjustment, by contrast, was around 7%. Greece achieved an annual rate of fiscal consolidation of 4%. of GDP on average over the post-crisis years, the highest in the developed world in recent years. The Greek government is running a primary surplus, meaning the difference between what it takes in in taxes and what it spends is positive. They expect to run that surplus for years to come.

To put those changes into context: pensions were cut by 21 on average, high end pensions by 40%. Average disposable income declined by over 35%. The minimum wage was cut by 32% for younger workers. The public sector lost 200,000 workers and wages for those remaining were cut by 23%. 30 privatisations have either been completed on put out to tender. 27% of the population are unemployed. The youth unemployment rate is 59%. The employed population has shrunk dramatically as young Greeks have left their homes and found work abroad, ironically, in Germany, mostly. The Greek recession is now longer than the US experience during the Great Depression of the 1930s.

And yet, for all of that pain, Greek national debt has exploded, and even after two large defaults it now stands at 174%. The European Central Bank (and other official funders) owns about 80% of this debt, and the other 20% is made up of Greek banks. Given that the ECB is very likely to allow the Greeks to roll over this debt, the stock of it really doesn’t matter very much any more. The raft of extensions, defaults, and restructuring of the flow of interest repayments means that the burden of interest payments is relatively low, given the size of the debt owed. For example, the Eurogroup decided to suspend interest payments on all EFSF to Greek loans for 10 years, meaning these loans are zero interest over the medium term. Greece will only spend 2.6% of its GDP servicing its interest costs. Ireland pays 4.1% right now.

There really isn’t much more restructuring the Greek people will put up with, so any gains from ‘competitiveness’ are pretty much out. The threat to Greece is coming from its banking system. Germany, France, and the UK own the majority of Greek bank-related debt.

So, the state of play is simple: the stock of Greek debt no longer matters, and the flow of interest servicing is manageable. Their banks are, to use a technical term, bunched. The negotiations will take place over the viability of the Greek banking system, in the context of the upcoming stress tests. Syriza aims to change the game Greece has been playing since 2008 by altering the terms of its bailout, and ending many of the more contentious policies, including halting or cancelling privatisations. They are right to do so. Greece has done enough.

For Europe, the only solution is to help Greece grow, and concede that repayments will never take place.