(From the Financial Times) What should Tsipras do now? Asks Wolfgang Münchau in the Financial Times. If the deal offered by the country’s creditors is reasonable, the prime minister should accept it. The problem seems to be however that no reasonable deal had been offered to Greece so far, and all the offers made by Greece have been rejected.
A reasonable deal is one that takes away the uncertainty Münchau argues. No investor is going to put their money into Greece so long as there is a threat of Grexit. For an agreement to be viable, it would need to reduce the probability of Grexit to zero. But reducing the possibility of Greek exit to zero requires a generous Greek debt restructuring, otherwise the threat of Grexit will continue to hover over the economy of Greece for the foreseeable future. On the other hand if certainty is the aim of the game, an exit from the euro will remove the uncertainty once and for all and investments will flock in.
The single most important part of the agreement and the major stumbling block to the negotiations, concerns the fiscal adjustment that Greece’s creditors are asking Athens to undertake. Münchau’s assessment is that the key variable is the primary surplus— the fiscal balance before payment of interest on debt: essentially the money a country has for debt servicing. But “experience shows that large primary surpluses are politically unsustainable. It was the unsustainability of the previous agreement between Greece, its European creditors and the International Monetary Fund that brought Syriza to power” he writes.
“I heard a respected expert on this issue recently proclaim that a primary surplus of 2.5 per cent of gross domestic product would probably work. The Greeks have demanded 1.5 per cent, which is a reasonable opening bid. One of the so-called “non-papers” — the documents officials leak without leaving fingerprints — that are circulating among the negotiators had mentioned a figure of 3.5 per cent, which strikes me as too high. A primary surplus of 4.5 per cent, as was demanded from 2016 onwards by the previous loan agreement , is plainly ludicrous.”
While Greek economic mismanagement brought about the crisis in 2010, the creditors are responsible for the current mess by insisting on an economically illiterate adjustment programme writes Münchau. And now that there is an opportunity to correct some of the mistakes made in 2010 and 2012 political intransigence on the part of the German creditors is refusing to accept that what is needed is the end of austerity. The key to a Greek economic revival has to be an end to austerity. This is why Grexit is not necessarily a solution, either, since it might bring even more fiscal consolidation. Greece would be cut off from international capital markets and unable to run a deficit.
The rest of Wolfgang Münchau’s article reads almost like Varoufakis: “What should happen now is what should have happened in 2010 and 2012 when the first and second Greek loan programmes were agreed. Athens should have been allowed to default. Instead, the creditors offered the country a dangerous pact: we help you roll over the debt; you run excessive primary surpluses in the future.”
“What would happen if Mr Tsipras was presented with such a choice again, and accepted? Greece would survive the summer without default but would require a third programme of financial help partly because its public finances have deteriorated so much since January. The probability that this process will derail at some point is high. So is the probability that investors know this.”
“This is why I am sceptical about another round of extend-and-pretend dishonesty where governments or banks grant loans in the full knowledge that they will never be repaid. It did work once. A year ago, investors were nearly euphoric. Greece regained access to financial markets. Real growth had briefly turned positive. But do they really think they can repeat this trick?”
“I doubt it. I see three plausible recovery scenarios. First, Greece may secure a credible deal with a primary surplus demand the right side of crazy. For this to work, such a deal would need the political backing of Mr Tsipras, the Greek parliament and Greek society. It would need to be opposition-proof because the deal still has to stand even if the government were to change.”
“A second scenario would be to allow Greece to default on its debt, for creditors to stop any further sovereign transfers and for the eurozone to take over the equity of the Greek banking system. If the Greek banks are no longer owned domestically and guaranteed by the government, there is no way Greece could ever be forced to leave the eurozone. A collapse of the banking system is the reason Grexit could happen.”
“And, finally, another way to get rid of Grexit fears would be Grexit itself. I would not favour this option. But creditors should know that it is no more irrational than imposing further austerity.”