Political theatre over Athens debt
Different reasons for delay across creditor-debtor divide
by David Marsh
Tue 14 Jan 2014
As Greece moves into the six month presidency of the European Union, a complex display of political and economic theatre is about to unfold on the European stage. The actors are an interlocking set of politicians and finance officials from the euro bloc’s principal creditor and debtor nations, bound together by a web of mutual suspicion – as well as potential collective reward.
All the participants in the drama are playing parts which, for them and the national interests they represent, are supremely logical and consistent. The problem is that these interests are not always consistent with each other – and may end up on a collision course.
The largest difficulty is the still sluggish and fragmented state of the euro bloc recovery, limping into a post-recession phase. Despite the gradual economic improvement and slackening of financial market tensions, Europe is subject to multiple threats, ranging from the progressive tightening of US monetary policy to upsets from China and other important emerging market economies.
The gap between, on the one hand, falling credit and rising unemployment in the hard-hit periphery countries, and, on the other, the buoyant mood on financial markets remains as acute as ever.
Greece, which only two years ago was the centrepiece of the world’s biggest sovereign bankruptcy, has the simplest and starkest objectives: to strike a statesmanlike pose and avoid behaviour that might upset the rest of the cast.
Action to reduce Greece’s public debt from 175% of GDP – compared with a figure of slightly more than 120% which is where the International Monetary Fund wishes it to be by 2020 – has been postponed until the second half of the year.
Action that was originally promised in 2012 but was shelved on the pretence that everything would be clearer after last September’s German parliamentary elections.
The full figures for the 2013 Greek budget performance will not be available until 23 April. European finance ministers would prefer to have no new controversy about aid for Greece until the May European Parliament elections, expected to see big gains for eurosceptic parties.
The two most important members in the Eurogroup of finance ministers, the body’s president Jeroen Dijsselbloem of the Netherlands and Wolfgang Schäuble of Germany, are both playing down any question of early Greek debt relief. Dijsselbloem says, somewhat optimistically, that the Eurogroup north-south split has been overcome. He says that, provided Athens sticks to austerity, there could be a Greek debt deal in the second half of 2014, after the European elections, but this will not involve any significant write-offs.
Given that Greek debt interest rate payments make up only 4.5% of GDP, Greece would need more than simple interest rate cuts on existing borrowing to make inroads into its debt mountain. So Antonis Samaras, the Greek Prime Minister, will have to wait months until he can announce any firm debt-cutting measures.
The common denominator linking finance ministers on both sides of the creditor-debtor divide is the desire to avoid further pain for electorates – either harsh borrowing conditions for the indebted states, or debt forgiveness by the surplus countries.
Yannis Stournaras, the Greek finance minister, says his country can carry out existing reforms, but balks at fresh measures, pointing to the slim parliamentary majority. The fear is that, in Greek municipal elections in May coinciding with the European poll, the Samaras government could face a major defeat that would endanger implementation even of the current reform programme.
Samaras and Stournaras have spoken about Athens possibly returning to the capital markets in the second half of the year – a claim treated with scepticism in Brussels. The Greeks are trying to emulate Ireland, which has departed from its European bail-out programme, and Portugal, which is considering a summer exit, as countries casting off the oppressive yoke of foreign financial rigour.
But there are plenty of voices pointing to hurdles ahead. One of these is Mario Draghi, the European Central Bank President, who last week played down views that the crisis is over. Draghi is worried that if governments slacken reform efforts, markets could disrupt bond yields again. Some prominent Greeks, including Deputy Prime Minister Evangelos Venizelos, have warned the Athens government could fall without a significant change in bailout repayments. Venizelos points out that if Greece left the euro, 'this could become a threat for the German taxpayer.' Such warnings illustrate the bumpy ride that the euro area still faces
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