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Analysis
What Tsipras should say to the creditors

What Tsipras should say to the creditors

Greece needs a debt service holiday 

by Meghnad Desai

Tue 27 Jan 2015

Alexis Tsipras has donned the crown of thorns. His task as Greek prime minister will not be easy. Any radical party coming to power almost always disappoints. Whatever a leader may say in opposition, once in office, your adversaries get you. They tell you why you can’t take measures that will upset the markets or Angela Merkel or the IMF.

Tsipras has to stay firm to his purpose. If his Syriza party ends up forming a conservative government, anarchy will result. Tsipras has to chart a path as close to the brink as possible. He has to wield the nuclear option of Greek exit from the euro so he can meet the demands of his voters waiting for a chance to regain an element of self-respect.

The voices of orthodoxy are powerful. They are the voices of reason, of moderation. But they are also the voices of self-interest. Tsipras has to resist them and make them an offer they can’t refuse.

The arithmetic of the Greek debt is inexorable. It is unpayable in any reasonable time frame without subjecting the Greek population to a generation of misery.

Tsipras has two choices. One is drastic. The other is only mildly catastrophic.

The drastic choice is to renege on all debt, or at least a large portion of it. Greece has done this before in its modern past as Carmen Reinhart and Ken Rogoff recounted in their book This Time is Different. Since independence in the 1830s, Greece has been in a state of default about 50% of the time. Refusing to pay debts would cut Greece off from international markets for a while, although creditors show a remarkable appetite to come back to lend more money. But there is a caveat.

Between 80% and 90% of Greece’s public sector debt of €320bn is held by the IMF, European governments and the European Central Bank – the so-called troika. Tsipras could say that, if other euro members wish Greece to stay in the single currency, they have to let Greece renege on perhaps 50% of the debt. That would be solidarity, Greek-style. Some countries may agree but I doubt the Germans would.

The other, more feasible choice is to ask for a holiday from servicing the debt for the next five years. Antonis Samaras, the former prime minister, managed to produce a primary budget surplus. So if Greece was forgiven debt servicing, it would be in a better position to manage its public finances – although it would still have to roll over maturing debt. Because of the exit of most private lenders, the average interest rate on Greek debt is down to 2.5%. Interest costs are around 4% of GDP. The amounts saved would be around €7bn a year, enough to make a difference, but not so large to cause a wholesale creditor revolt.

I believe the best option would be for Greece to renege on all debt, but that is probably unachievable. My more moderate proposal is second best, but it is workable. The Tspiras government should table this relatively mild demand as soon as possible. The euro bloc’s de facto leader Angela Merkel and the rest of the troika would be well advised to accept it.

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