The PJ Tatler

Fear of the Unknown Driving Greek Debt Deal

It appears that Greece will meet its midnight deadline to come up with concrete proposals to address its debt crisis, and there are signs that some of the hardliners in the EU are backing off some of their earlier statements of what the rest of Europe will do to salvage the Greek economy.

Forty-eight hours ago, it appeared that Greece was headed for catastrophe. Several prominent officials in the EU suggested that Greece wasn’t serious about reforms and that a “Grexit” was imminent.

But now, it appears that even the hardest of the hardliners — Germany — are climbing down from some of their tough rhetoric and may be ready to deal with some of Greek Prime Minister Alex Tsipras’s concerns. Most notably, German Chancellor Angela Merkel has left the door open to some kind of debt restructuring — an issue that was a non-starter earlier this week.

Washington Post:

German officials have been some of the staunchest opponents of debt forgiveness, but on Thursday they left the door slightly open to creative bargain that could give Greece a measure of what it wants. During a visit to Bosnia, German Chancellor Angela Merkel said “a classic haircut” would be a nonstarter.

Analysts said her comments indicated that she was ruling out a plan that simply cut the total amount of debt. But she could be more open to possible concessions such as greater flexibility in repayment or lower interest rates.

“Angela Merkel chose this wording, because in the past five years, she has always publicly rejected a debt haircut,” said Julian Rappold, an expert for Greece and the European Union at the German Council on Foreign Relations. “She has to justify to the German population that their tax money will be lost. It has been a mistake in communication to always say, ‘No, this is not going to happen, these are only loans.’”

Speaking along side his French counterpart on Thursday, German Finance Minister Wolfgang Schäuble — seen as even more hawkish on Greece than Merkel — insisted that a “haircut,” or outright debt forgiveness, would violate European Union laws.

But even he conceded that Greece’s current debt was no longer sustainable, though there were few options for dealing with it.

“I think the leeway we have thanks to the restructuring of debt or the reprofiling of debt is very low,” he said.

Pressure on Merkel to bend has been ratcheted up in the last 48 hours as the exit of Greece from the euro became more than just an academic question:

Germany is at last bowing to pressure as a chorus of countries and key institutions demand debt relief for Greece, a shift that could break the five-month stalemate and avert a potentially disastrous rupture of monetary union at this Sunday’s last-ditch summit.

In a highly significant move, the European Council has called on both sides to make major concessions, insisting that the creditor powers must do their part as the radical Syriza government puts forward a new raft of proposals on economic reforms before a deadline expires tonight.

“The realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors,” said Donald Tusk, the European Council president.

This is the first time Europe’s institutions have acknowledged clearly that Greece’s public debt – 180pc of GDP – can never be repaid and that no lasting solution can be found until the boil is lanced.

Any such deal would give Greek premier Alexis Tspiras a prize to take back to the Greek people after they voted by 61pc to 39pc to reject austerity demands in a landslide referendum last weekend.

While he would still have to deliver on tough reforms and breach key red lines, a debt restructuring of sufficient scale would probably be enough to clinch a deal, and allow him to return to Athens as a conquering hero.
The Greek parliament is due to vote to ratify the measures on Friday.

Still to be determined is what kind and how much assistance the European Central Bank will give to Greek banks. The banks in Greece have been closed 11 days with no plan to reopen them. Capital controls are strangling the economy with most factories and businesses closed because they can’t pay their employees. Emergency loans to the banks from the ECB have been frozen until some kind of a deal is inked between Athens and its creditors.

One plan being discussed would be a bank consolidation in Greece, with a depositor haircut of 30%. The ECB would then lift its freeze on loans and theoretically, the Greek banks could get back on their feet.

What is driving Europe to make a deal with Greece is simply fear of the unknown. There is no previous experience with a supposedly industrialized society in the middle of Europe blowing up economically. There is no experience with fallout from a Greek meltdown. “Contagion” is a highly subjective concept because at bottom, it depends on the human factor. Experts can assure us that other European countries can handle the contagion, but the psychology of markets in crisis is not predictable. Panic — even if just for a few hours — could lead to a 2008-style meltdown that could threaten the world economic system.

No one can imagine the worst case scenario, which has stable and prosperous countries like Germany and France very nervous. In the cold light of day, as the potential consequences of their hard line becomes apparent, punishing Athens or setting an example to the rest of the debtor countries doesn’t seem quite as important as saving Greece.

Of course, this doesn’t guarantee there will be a deal. But an agreement is more likely than it was just 2 short days ago.