Eurozone finance ministers will look at Greece’s latest proposals in more detail this week, illustrating that Greece has a strong hand at the bargaining table. This strength is surprising given their weak economy. The ace in Tsipras’s hole is his nation’s “primary budget surplus.” That means that the government’s revenues are greater than expenditures when debt service is ignored. Last year’s primary budget surplus was €1.9 billion, almost four percent above non-interest expenditures, though below projections. For the first three months of 2015, Greece’s financial statements show an even greater margin.
Although you and I cannot ignore interest and principal payments on our debt, Greece could. The nation might say, “We’re not paying these debts.” They could even channel Elizabeth Warren and say that the whole mess is the fault of creditors, who never should have extended the loans in the first place. Whatever the language used, Greece could refuse to pay its debts.
The initial problem with default is that no one would want to make another loan to Greece. Perhaps it’s not so much of a problem, though. Greece might have some need for temporary funds, as revenues and expenditures may not match on a month-to-month basis. (A quick look did not show if this would be an issue.) However, if this is their only problem, they could probably get a short-term loan even after a default. It sounds crazy, but post-bankruptcy debt is pretty popular. After getting out from under past loans, the borrower looks more credit-worthy.
Default would not necessarily mean a different currency, like a return of the drachma. Even if the eurozone didn’t want Greece anymore, nothing would stop the country from declaring that it was paying government employees in euros, demanding that tax be paid in euros, and allowing Greek banks to do business in euros. Some countries use the U.S. dollar as their official currency, without needing permission from the United States government to do so. (More interesting material on this subject is in Altig and Nosal’s Dollarization article.)
If Greece defaults, it may well abandon the euro. Who knows, they may already have drachma printed up just in case. Or a private banknote printer could have made up a bunch of notes on the off chance that Greece suddenly is in the market for currency. A new currency would hurt Greek citizens in the short run (higher import costs) but allow the country to be more competitive in the long run. Given the populace’s opposition to reform, a depreciating currency may be the next best policy possible.
Greeks have already taken much of their money out of Greek banks, out of fear that they would wake up one morning and learn that the government has changed their euros into drachma. The current pace of withdrawals is not quite a run on the banks, but some analysts call it a jog.
Payment of the debt is just part of the issue in negotiations. The core of European countries want Greece to enact market-oriented reforms that would stimulate their economy. This is a good idea, but resisted by Greeks who are used to earning good money for little work in government sinecures.
What of the bargaining position of core Europe? Greece’s debt is mostly held by the European Union, with additional holdings by the International Monetary Fund and the European Central Bank. Only 22 percent is held by others. The European economy is large enough to write off the Greek debt.
Political leaders, though, are in a different position. The public in core Europe will be outraged if Greece defaults, effectively sticking other European taxpayers with the tab for Greek irresponsibility. For people like Angela Merkel and François Hollande, this is probably a greater concern than the substance of the default.
The likely result is a compromise that enables Greece to ignore structural reforms and delay debt repayment, while allowing core European leaders to save face with their voters. Stay tuned as the drama unfolds.
Comments
Log in or sign up to join the conversation.