Anatole Kaletsky has a cognent, forcefully argued new article at the Project Syndicate website, Why Syriza Will Blink, which independently comes to the conclusion we’ve reached, that the winning strategy for the Eurozone creditors is to keep Greece in the sweatbox and use worsening economic and social conditions in Greece to crush domestic support for Syriza. Kaletsky goes further than we have, arguing that this is the course the Troika is taking, and the new coalition should have anticipated this as a likely strategy, since it’s the same one they used successfully against Cyprus two years ago.
We’ll go through Kaletsky’s case in detail. Some readers may claim that the European lenders won’t let Greece default, since it would force them to recognize losses on Greek debt. One channel is that losses on credit extended to Greek banks through the ECB would be allocated back to national central banks, and that in turn would require taxpayers to recapitalize those central banks (Germany certainly takes that view) which in turn means having to have taxpayers fund those shortfalls.
However, it’s not clear that this is the third rail issue it once was. First, the ECB is in the midst of QE. Each national central bank is required to buy a certain number of bonds. One argument made by financial experts about the design of QE was that some countries would find it hard to buy their allocation. Operationally, the countries could issue bonds and have the ECB buy them. This in theory does not solve the problem that this borrowing would put some countries over their Maastrict treaty annual deficit limits, but one suspects an event like a Greek default would lead to that rule being suspended.
Second, the IMF has also been priming national governments to expect to recognize losses on their loans to Greece. Remember that the IMF has threatened that it won’t release its portion of the €7.2 billion in bailout funds to Greece unless the Eurozone lenders write down their loans to Greece, a commitment they made in 2012 but then failed to implement. Syriza had assumed as part of its negotiating strategy that it can get its creditors to relent was that a Greek default would force them to realize losses on their loans, which is something the governments have been fighting to avoid for years out of fear of negative voter reaction. But if the IMF is going to force them to recognize losses regardless, having Syriza default is no longer an event horizon. One has to suspect that given that the IMF seems determined to have Greece hew to its pre-existing IMF structural reforms for larger institutional reasons (as in in it is running programs all over the world and does not want to reward defiance), one can imagine that the threat of withholding bailout funds has more to do with the IMF getting the Eurozone over its unwillingness to realize losses. In other words, the IMF was not trying to help Greece but was out to preserve the IMF’s upper hand in negotiations.
Here is Kaletsky’s reading of the bare-knuckle fight:
Since coming to power in January, the Greek government, led by Prime Minister Alexis Tsipras’s Syriza party, has believed that the threat of default – and thus of a financial crisis that might break up the euro – provides negotiating leverage…
But their calculation is based on a false premise. Tsipras and Varoufakis assume that a default would force Europe to choose between just two alternatives: expel Greece from the eurozone or offer it unconditional debt relief. But the European authorities have a third option in the event of a Greek default. Instead of forcing a “Grexit,” the EU could trap Greece inside the eurozone and starve it of money, then simply sit back and watch the Tsipras government’s domestic political support collapse.
Such a siege strategy – waiting for Greece to run out of the money it needs to maintain the normal functions of government – now looks like the EU’s most promising technique to break Greek resistance.
Kaletsky point out that this strategy appeared sound in January, when Greek was running a large primary surplus. If it defaulted then, it would still have enough funds to support normal government operations. But all that changed as Syriza’s brinksmanship has stoked an ongoing bank run, dampening the economy and reducing tax receipts. Even worse, Greek citizens used the arrival of a new regime as reason to withhold tax payments, starving the government of needed funds. As a result, the only way the government has managed to preserve a primary surplus is through budget cuts and unsustainable strategies to raise cash, like deferring payments to vendors and raiding every funds store that the government can lay its hands on.
With the primary surplus gone, a default would no longer permit Tsipras to fulfill Syriza’s campaign promises; on the contrary, it would imply even bigger cutbacks in wages, pensions, and public spending than the “troika” – the European Commission, the European Central Bank, and the IMF – is now demanding…the EU can now rely on the Greek government itself to punish its people by failing to pay wages and pensions and honor bank guarantees.
Tsipras and Varoufakis should have seen this coming…The Cyprus experience suggests that…the EU is likely to force Greece to stay in the euro and put it through an American-style municipal bankruptcy, like that of Detroit….
The European treaties state unequivocally that euro membership is irreversible unless a country decides to exit not just from the single currency but from the entire EU….
If Greece defaults, the EU will be legally justified and politically motivated to insist that the euro remains its only legal tender. Even if the Greek government decides to pay wages and pensions by printing its own IOUs or “new drachmas,” the European Court of Justice will rule that all domestic debts and bank deposits must be repaid in euros. That, in turn, will force a default against Greek citizens, as well as foreign creditors, because the government will be unable to honor the euro value of insured deposits in Greek banks.
So a Greek default within the euro, far from allowing Syriza to honor its election promises, would inflict even greater austerity on Greek voters than they endured under the troika program. At that point, the government’s collapse would become inevitable….As soon as Tsipras realizes that the rules of the game between Greece and Europe have changed, his capitulation will be just a matter of time.
And the beauty of this approach is that all the creditors need to do is stand pat and let the Greek government continue to flail about. Indeed, they can even claim they have been generous by allowing Greece to go beyond the end of April deadline for reaching a bailout deal agreed in the February Eurogroup memo, and by graciously “helping” Greece stay in the Eurozone in the event that the government decides to default rather than cut its losses sooner and give in. The objectives of the creditors are to make sure that the Greek government suffers for defying them, and it does not care how much the Greek people suffer to achieve that outcome (remember, they have been indifferent to the considerable pain already endured by Greek citizens).
As we said from the very outset, Greece was very unlikely to prevail unless it secured meaningful support from outside parties. The only two sources that might have had the heft to change the course of action were the US and resurgent leftist movements in periphery countries securing meaningful gains in polls so that the Eurocrats might think it wise to defuse the Syriza threat. The US quickly reversed its initial show of support for Syriza and leftist parties have steered clear of allying with new Greek government. The vultures recognize the ruling coalition’s weakness and merely need to wait for the death spiral to play out.