Syriza wants to reduce the burden of Greek government debt by various means, which would clearly benefit Greece and mean losses for its creditors. Its bargaining position is strong because the government is running a primary surplus. This means that if all debt was written off and the Greek government was unable to borrowing anything more, it would be immediately better off because taxes exceed government spending. In contrast the creditors’ position in such a situation is normally very weak, which is why some kind of deal is usually done to reduce the debt burden. Creditors take a hit, but not as bad a hit as they would if all debt was written off.
It might appear as if the creditors have an extra card in this particular case - they can throw Greece out of the Eurozone. Be absolutely clear, that is a threat being made by the creditors. Greece under Syriza has no intention of leaving the Euro, even if they defaulted on all their debt, so they would have to be forced out. I have never seen it set out clearly how the rest of the Eurozone would force Greece to leave without compromising the independence of the ECB, but let’s assume that they have the power to do so. Would the Eurozone ever carry out this threat?
Expelling Greece from the Eurozone because they wanted to renegotiate their debts would be an incredibly stupid thing to do. For a start, the creditors would lose everything, because obviously Greece would go for complete default in those circumstances. In addition, individuals and markets would immediately worry that the same fate might befall other periphery countries. (The story that Dani Rodrik tells is all too plausible.)
So even if some in Germany were stupid and cruel enough to suggest throwing Greece out, it seems inconceivable that the rest of the Eurozone (or the IMF) would allow it. In reality reducing the debt burden in Greece (and probably elsewhere ) would do the Eurozone a lot of collective good. Greece would be able to relax the crippling austerity that has had disastrous economic and social consequences. The core countries and the IMF could at least partially undo the mistakes they made from 2010 to 2012 in first delaying default, and then failing to impose a complete default, mistakes the IMF at least now recognise.
Wednesday, January 14, 2015
Publicada por Miguel Madeira em 11:49