26 Jan 2015

Can Greece really walk away from its debts?

The far left party Syriza won the Greek elections after telling voters much of the country’s debt would be written off. How likely is this?

Syriza leader Alexis Tsipras could not have been clearer when he spoke to Channel 4 News on 7 January. “There cannot be a solution without writing off a large part of the debt,” he told Economics Editor Paul Mason.

Greece’s total debt is 323bn euros, including the 240bn euro bailout it negotiated with eurozone countries, the European Central Bank (ECB) and the International Monetary Fund (IMF).

It is the eurozone that takes the biggest hit if Greece defaults because it owns 60 per cent of its debt, with the IMF and ECB owning 10 per cent and 6 per cent respectively.

The UK is not a member of the eurozone, but it contributes to the IMF. Of the 32bn euros the IMF has loaned Greece, the UK stands to lose £1.6bn – a relatively small amount of money in the context of the huge sums involved in the bailout.

Who blinks first?

Mr Tspiras said in his victory speech that he is prepared to negotiate with other European countries. How far he is willing to go remains to be seen, but from the noises coming out of Berlin and other capitals in the run-up to the elections, Syriza will not have an easy ride – and the likelihood is that it will blink first.

This is where domestic politics would come into play. With Greek voters promised a way out of austerity during the election campaign, their patience would be sorely tested if Syriza fails to deliver.

As a member of the euro, a Syriza government cannot simply do as it pleases. Mr Tsipras has said that he, along with a majority of Greeks, wants Greece to remain in the single currency, while Yanis Varoufakis, tipped as Greece’s new finance minister, told Channel 4 News just before the poll that there was a “zero” chance of the country being forced out of the euro.

The language from Syriza has changed in recent months. There is less bluster and more talk of negotiation and the rescheduling of debt.

I have a feeling the big move would have to be from Syriza because they seem to have a less strong hand to negotiate with. Raoul Ruparel, Open Europe

Raoul Ruparel, head of economic research at the Open Europe think tank, told Channel 4 News: “There’s been change over the last two years, which continued in the run-up to the elections.

“The position seems to be increasingly moderate. They used to be anti-euro, but their past has come a long way – normal progress for a party going from an extreme fringe to a governing party. Now they’re talking of mutual renegotiation rather than doing anything uniltaterally.”

Compromise scenarios are beginning to emerge, but greement with Greece’s creditors is a long way off.

Red line

Mr Ruparel believes the IMF and ECB will refuse to renegotiate, while for the eurozone to do so would require unanimous agreement – and Germany, Holland Finland have already ruled this out.

One compromise could be easing the terms of the repayment schedule, reducing the interest payable on loans, and introducing a moratorium on repayments until Greek growth improves.

A complete debt write-off appears impossible, according to Mr Ruparel, “while a token rescheduling of debt is unlikely to satisfy Syriza supporters”.

Asked if the idea of a write-off was dead, he said: “I think it is in a number of ways. The first reason is that they know it’s not a great way to approach negotiations by drawing a red line in the sand. They also know if they acted unilaterally, the ECB would cut off Greek banks from liquidity.

“The banks would not be able to fund themselves or play a role in funding the government or the wider economy. It could precipitate a messy exit from the euro, which the polls say Greek people don’t want.”

So who will buckle? “I have a feeling the big move would have to be from Syriza because they seem to have a less strong hand to negotiate with.”