The Greek drama has entered its endgame. The Greek government has to repay loans to the IMF and other public institutions in the near future but does not have the cash to do so. The lenders refuse to come forward in providing liquidity as long as the Greek government does not accept the conditions they impose.
We now hear from the finance ministers that the Greek government is unreasonable because it does not want to accept these conditions. These are that austerity be fully implemented and that the structural reforms that have been agreed to by the previous Greek government, be fully carried out.
But are these conditions reasonable?
The austerity measures that were imposed since 2011 led to devastating effects on the Greek economy. They drove millions of people into unemployment and poverty, and produced intense political instability that is responsible for the rise of Syriza. Insisting on further austerity does not seem reasonable when the failures of this strategy have become so obvious. The surprising thing is that ministers of finance continue to hold the moral high ground and preach to the Greek that they should be more reasonable. Being reasonable is equated to accepting the conditions of the creditors even if these conditions have failed to produce positive results. It is even more surprising that most of the media have now accepted this story.
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Some of the structural reforms the creditors insist on are badly needed. Tax reform that would lead the rich to pay taxes is one. But surely this is a reform that the Tsipras government, in contrast to the previous government, is willing to introduce. But other structural reforms are patently unreasonable. The privatization program that was agreed with the previous government and that the creditor nations insist should be implemented does not make sense. A country should not be pushed into disposing of its valuable assets in a forced fire sale. This will lead to very low revenues for the Greek government and will mainly profit the buyers, some of which are companies in the creditor nations.
We are now being told that the responsibility for failure rests entirely with the Greek government that remains unreasonable and unreliable. It is exactly the opposite. The intransigence of the lenders and the unreasonable demands they impose on a country are responsible for the drama that unfolds.
There is a big contradiction in this intransigence. As is well known, Greece has profited from debt rescheduling in the recent past. Maturities on the debt were extended and interest rates were lowered. According to the Brussels think tank, Bruegel, the effective Greek public debt represents only about 60% of Greek GDP. This appears to be sustainable, provided the Greek economy can function normally. Put differently, Greece can be said to be solvent but illiquid.
The lenders, however, keep the money tap closed. As a result, financial markets are now speculating that the Greek government will not be able to respect the next repayment deadline and will be forced to go into default. The interest rates on Greek government bonds have shot up to levels that make the debt service unsustainable and that make it impossible for the Greek government to refinance itself in the bond market. Speculation has become self-fulfilling and is driving the Greek government into default. But note that this is the outcome of the decision of the creditors not to provide liquidity to the Greek government. It is precisely because the lenders do not want to provide liquidity that Greece may be forced to default. It looks like the creditors are pushing Greece deliberately into default.
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The ECB is carrying a great responsibility. By providing liquidity it could unlock the stranglehold the Greek government is kept in. Refusing to provide liquidity would make the ECB the single most important actor responsible for a Greek default and a possible Grexit.
This post was first published on Paul De Grauwe’s Blog.