21 January 2015

Greece: Are more bailouts inevitable? No – if Syriza wins

A central problem of democracy is that you can only vote for someone whose name is on the ballot paper, so many voters may have to choose the “least bad” candidate rather than have the opportunity to say what they really want.  Eurobarometer regularly polls the public in all euro area states to ask their views, and Greek public opinion is clear-cut (as at October 2014):

• The euro is a `good thing’: 59% Yes (up from 58% in 2013) (28% No)
• Is economic co-ordination in the euro area good? Should there be more? 80% Yes (7% No)
• There is a need for significant reforms to improve the performance of our economy: Agree 72% (Disagree 25%)

After 17 elections since the return of democracy in 1974 and either New Democracy or Pasok have formed the government – or, more recently, acted in coalition. The result of rule by these two parties for 40 years has been utter ruin for the vast majority of Greeks, but great enrichment for a tiny minority of `oligarchs’. After 17 triumphs of hope over experience, perhaps the time has come for Greece to try something completely different. The only realistic name on the ballot paper is Syriza. If they had the opportunity, could Syriza instigate the “significant reforms to improve the performance of our economy” that 72% of Greeks want?

Associated Press reported the Syriza leader saying “We demand the immediate end of austerity, an agreement for debt haircut and a significant cut in the annual cost of servicing the debt.” Could he be demanding something that is quite likely anyway – though perhaps on a more moderate scale than the political hyperbole suggests? In politics, presentation is everything (nearly).

The European Commission’s Autumn Forecast was very positive about the outlook for Greece. In 2016, Greece is expected to grow twice as fast as the euro area average, and its 3.7% growth would put it level pegging with Ireland as the top-performing economy. Employment would rise sharply and the unemployment rate fall from 27% last year to 22%. Correspondingly, the public debt ratio would fall from 175% of GDP to about 160%; hardly any borrowing from the rest of the world would be needed and the budget would be close to balance. Moreover, investment is set to boom. The government that can claim ownership of such a turnaround would earn great plaudits from the electors as `austerity’ would indeed have ended.

“Cutting the annual cost of servicing the debt”: Public debt interest charges peaked in 2011 at 7.3% of GDP and fell to 4.3% last year. With little fanfare, the EU has already extended the maturity of it loans from the EFSF to an average of 32 years; at an interest rate of 1.5% (basically the EFSF’s borrowing cost); and given a 10 year moratorium on interest payments. As EFSF CEO Klaus Regling put it, these policies produce “annual budget savings of €8.5 billion per year, or the equivalent of 4.5% of Greek GDP - year after year. Consequently, there is no debt overhang in Greece over the next 10-20 years, despite very high debt to GDP ratios.” As this feeds through fully, debt interest in 2016 should have fallen to 4.0% of GDP. Plenty of opportunity to declare victory.

What exactly is a “debt haircut”? Some further extension of maturities and interest moratorium would naturally reduce the “present value” of the debt. Any worthwhile politician should be able to portray that as a “haircut”, especially by comparing the present value with the level before the maturity extension/interest moratorium.

The alternative policy of forcing a default – perhaps associated with “Grexit” (though it has never been clear how that could be achieved within the existing EU Treaties) would create massive economic disruption. The absence of an interest moratorium for a decade would probably cause an increase in interest payments as the `new Greece’ might find it difficult to borrow in the markets at the same rate as the EFSF and pay interest every year from now on.

The final case for a Syriza vote is their declaration of war on the `oligarchs’: The Financial Times recently published a fascinating article describing their shadowy hold on power. Any casual reader of the Troika reports on Greek compliance with EU conditionality is struck by the dogged resistance of certain sectors of society to reforms that the rest of the EU takes for granted. Indeed, the electors of Greece seem to want this. But their will has been frustrated 17 times so far. Syrizia’s “demands” seem on the verge of happening anyway. Is this the best opportunity for 40 years to vote for genuine and permanent reform?