What a Eurogroup-brokered deal with Greece might look like


At times this week, it has felt nearly like the European Union was brokering a bailout of Ukrainian debt, while working to negotiate a ceasefire with Greece.European_UnionGreece Flag Icon

But as Greece’s new left-wing government and the Eurogroup, the collection of eurozone finance ministers, work over the weekend for a new Greek debt deal to float Greece’s treasury for the next two years (or thereabouts), there are glimmers of hope on both sides that a deal might possibly emerge. Negotiations continue as the February 28 deadline approaches, when Greece’s current bailout program is scheduled to end.

So what might that deal ultimately be? Above all, any deal that attempts to put Greece on a long-term path to prosperity needs to start from the notion that its debt burden of nearly 175% of GDP growth is simply unsustainable. You might not hear that in public from figures like German chancellor Angela Merkel, German finance minister Wolfgang Schäuble, European Commission president Jean-Claude Juncker or Eurogroup president and Dutch finance minister Jeroen Dijsselbloem, but it’s likely another story in private.

No matter how many cuts successive governments make to future budgets, the cost of servicing that debt will cripple its ability to provide the same level of public services to Greek citizens — especially at a time when unemployment remains so high. (Not everyone has the view, however, that the Greek debt burden is so incredibly unsustainable).

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Here’s an outline of what to expect — perhaps as soon as early Monday morning:

1. No haircuts

First, European leaders will be incredibly reluctant to write off any portion of Greece’s debt burden, around two-thirds of which comes from the two ‘troika’ bailouts — the €240 billion in financing from the International Monetary Fund, European Central Bank and the European Commission that Greece has needed to finance its government since 2010. As so much Greek debt (around two-thirds of the total) is concentrated among the ‘troika,’ it would be easy for one or more of its lenders to accept a haircut of the Greek debt. But politically, that’s impossible. Merkel is already feeling incredible pressure from within her center-right Christian Democratic Union and an increasingly eurosceptic right-wing opposition in her own country. Writing down the headline amount of Greek debt would give Merkel’s critics ammunition to attack her for being too soft on Greece. It would also embolden anti-austerity political groups in other European countries (most notably, Podemos, which leads polls in advance of the Spanish general election later this year) and create future moral hazard concerns. In any event, Greece’s new prime minister Alexis Tsipras has backed off his most strident calls for a complete writeoff.

2. Extension of payment period

One of the more interesting ideas forwarded by economists in Tsipras’s ruling party, SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς), is lengthening the payment period of Greek debt to 60 years, with (even more) lenient interest options. Though no political leader will admit it, that’s paramount to a back-door debt write-down, provided that Europe doesn’t enter a decades-long deflationary period. Even if the payment period isn’t extended to 60 years, the idea is still fundamentally sound — it’s a way of acknowledging that the current path to Greek solvency isn’t working without accepting the politically radioactive step of writing off Greek debt. An alternative scheme promoted by finance minister Yanis Varoufakis (pictured above with Dijsselbloem and the IMF’s Christine Lagarde) would link payment of newly issued Greek debt to GDP performance.

3.  A fresh approach to reforms

One of the positive aspects of SYRIZA’s victory is that it cast political elites from both the Greek left and the Greek right out of power. The five dozen or so families that dominated Greek politics since the end of military rule in 1974 (and, in many ways, long before the dictatorship) have governed Greece in an incredibly cozy way, commingling the lines between business and political success. The new government’s leaders, more than any government in decades, has no interest in perpetuating the rent-seeking privileges of holding power. That means that Tsipras may have more success targeting tax evasion and other good-government reforms that previous center-right and center-left governments alike never fully embraced. If I were Tsipras and Varoufakis, I would be emphasizing this point as often as possible in negotiations. Any concessions from European leaders will hinge on how seriously they take SYRIZA’s will to move forward with at least some new reforms.

4. Some amount of growth-oriented spending

Though the Greek economy is expected to return to growth in 2015 after six consecutive years of contraction, economic conditions certainly won’t feel normal for years. Joblessness remains stubbornly high (around 25.8%). Even the IMF now admits that austerity measures demanded as a condition to Greece’s two bailouts were far more damaging than anticipated. That means that any new financing package for Greece must give Tsipras some room to take limited, responsible measures that begin to boost aggregate demand. Consumer confidence isn’t returning anytime soon, but a solid deal with EU leaders will restore some amount of business and industrial confidence that Greece won’t be leaving the eurozone. If European leaders will have to provide €15 billion or more to Greece over the next two years anyway, why not include a little more to give Tsipras the flexibility to raise the minimum wage or hire a few more workers to provide better health, education and social welfare services?

The previous government’s commitment to maintain a primary surplus (i.e., a budget surplus before debt payments) of between 3% and 4% is a good place to start. For all his supposedly radical views, Tspiras promised during the campaign to run a balanced budget, and he has now indicated that he might be able to live with even a 1.5% primary surplus. Even if Tsipras has to concede that much of the ongoing privatization process should continue, it won’t take too much for Tspiras to be able latch onto some victories and declare the ‘end of austerity,’ especially after the draconian terms that the prior governments ultimately accepted. With luck, the natural business cycle and benefits from the ECB’s new quantitative easing program will amplify Greece’s nascent recovery and do much of the hard work of making the recovery “feel like” a recovery.

5. A short-term deal

Though Greece needs funding through at least 2016, there’s a possibility that the two sides could reach a temporary deal to ally the Greek government’s financing for, say, the next six months, giving both sides more time to find common ground for a long-term deal. Tsipras took office in late January, and no one wants the eurozone to implode simply because there wasn’t enough time to work through a thoughtful solution to the standoff between Greece and Europe. A six-month fix gives Tsipras, Varoufakis and the new Greek government some more time to get their bearings in power.

6. The Greek government still has leverage,
just not the kind we were all thinking

With European elites no longer quite as worried about the repercussions of a ‘Grexit’ and the contagion that Greece’s eurozone exit would mean for Italy, Spain and other eurozone members, Tsipras has a weaker hand than he might have had in 2012.

But European elites still aren’t taking seriously enough the possibility that Greece could turn to Russia for emergency loans, giving the Kremlin an instant geopolitical lever inside a NATO country. Russian foreign minister Sergei Lavrov reiterated on Wednesday that Moscow would consider a Greek deal in comments following a meeting with Greece’s new foreign minister Nikos Kotzias. That echoes earlier comments from Russian finance minister Anton Siluanov, and Russian president Vladimir Putin has already invited Tsipras to Moscow in mid-May for a state visit. Though SYRIZA itself is sympathetic to Russia and opposes tough EU sanctions related to the ongoing civil war in Ukraine, its junior partner in government, the right-wing Independent Greeks (ANEL, Ανεξάρτητοι Έλληνες), and its leader, defense minister Kammenos is happy to play up nationalist solidarity with Russia rooted in their shared religious tradition of Orthodoxy.

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