Debt crisis as seen from Greece

If all targets are reached, Greece's debt-to-gross-domestic-product (GDP) ratio will only be down to 120 percent by 2020.This “success” would only be in the Sisyphean tasks -- in reference to Greek mythological hero Sisyphus, who was punished by being compelled to roll an immense boulder up a hill only to watch it roll back down, and to repeat this action forever -- asked of Greeks by foreign lenders, plus for decent growth. Since the beginning of the crisis, I have argued that either Greece should exit the eurozone or its European creditors should accept a great “haircut”, a euphemism used by finance people to stigmatize a forgiven debt. Let me point out that banks holding Greek sovereign debt have already accepted a haircut worth more than 50 percent of what they are owed. The haircut needed now directly concerns the European Stability Fund because the International Monetary Fund (IMF) is not allowed to forgive any debt on its own.

Some European Union members -- particularly German Chancellor Angela Merkel -- refused until recently any possibility of a haircut, afraid of the reaction of her tax-paying electorate. However, it seems that Merkel is changing her mind. A few days ago she said in an interview with Bild am Sonntag that they could consider forgiving more Greek debt after 2014 if Athens' financial situation improves. “If Greece can once again get by without taking on new debt, then we must look at and assess the situation. That won't be the case before 2014/15 if everything goes according to plan,” she told the paper. So, the “Iron Chancellor” envisages easing Greece's debt burden once the German elections, to be held in September of 2013, are over.

The question is whether the Greeks can hold out that long. Nick Malkoutzis, a well-known columnist of the Greek daily Kathimerini, explained recently how Sisyphus has made at least halfway. Malkoutzis wrote: “It should be about acknowledging that some of the key weaknesses that were so publicly aired at the start of the crisis: public spending, wage costs and a current account imbalance have now largely been corrected. It should also be about recognizing that this, possibly the world's most dramatic fiscal adjustment, has come at a huge cost, one that cannot be borne indefinitely.”

Indeed, according to recent figures, the Greek current account balance saw 775 million euros of surplus in September. Greek deficit was more than 20 billion euros a year before the crisis struck. It is true that this surplus was reached with the collapse of domestic demand and not through a spectacular increase of the exports, but the effort is obvious anyhow. According Malkoutzis, “the Finance Ministry confirmed another primary surplus [budget surplus excluding interest payments], of 930 million euros, in October.” All of these achievements have been made in the context of an ominous economy where there has been a 3.6 percent reduction in disposable income, a 15.1 percent drop in compensation, a 9.5 percent reduction in welfare benefits and a 37.3 percent increase in taxes within a year.

Malkoutzis says that it would be worth considering “which of the EU governments would survive, which of their electorates would tolerate and which of their countries would be able to absorb the impact of such an abrupt adjustment. Greece has paid and is continuing to pay for its grave mistakes but we have reached the point where its partners must realize that they hold the key to the country being able to make a fresh start. The fiscal consolidation and the structural reforms [those already carried out and many more still to come] will count for nothing if there is no convincing deal on Greek sustainability.”

Admittedly, Sisyphus needs a hand from its European partners. But this hand has a sizable cost in terms of income transfers for taxpayers, except those belonging to members that have already signed stabilization programs with Brussels. The fundamental problem in the eurozone is actually to what extent the “wealthy” taxpayers of the north will be accept such income transfers to European citizens of the south. In other words, what is the acceptable cost to pay to avoid a disorderly Greek default?  A haircut for Greece must happen sooner or later, but probably also for some other heavily indebted countries. But what will be the political costs to the decision-makers of these haircuts? I believe no one knows the answer.