Greek financial crisis tests EU stability

With the left-wing Syriza political party now leading a ruling coalition in Greece, there are concerns about whether Athens will continue to make good on its more than $260 billion economic bailout and austerity agreement with the so-called “troika” — the European Commission, the European Central Bank and the International Monetary Fund.

Analysts and investors are closely watching Greece’s new prime minister, Alexis Tsipras.

Barely a week in office, Tsiaris has seen wide swings in Greek government bond yields and a roller coaster stock market tied to whether he will follow through on his campaign promises to curtail economic reforms and renegotiate Greece’s huge sovereign debt.

Tsipras said Wednesday he is optimistic that his country can convince its international lenders to ease the terms on Athens’s massive bailouts.

Tsipras met with key European Union leaders in Brussels, including EU chief Jean-Claude Juncker, and called for working out a four-year reform plan to boost the struggling Greek economy.

The Greek leader, 40, said his country respects EU financial rules, but believes that the tough austerity measures demanded by the country’s creditors in exchange for nearly $300 billion in loans need to be changed.

“We want to recorrect this framework,” Tsipras said, “not to smash this framework and we believe that in this framework we could find a common viable solution for our peoples, for our common perspective. I am very optimistic that these discussions that were in a good way – of course we don’t have already an agreement – but we are in a good direction to find a viable agreement.”

Although Greek leaders have taken a more conciliatory tone on debt talks in recent days, analysts like Desmond Lachman of the American Enterprise Institute here in Washington point out that uncertainty over Greece’s intentions has led international investors to withdraw as much as $16 billion from Greek financial institutions during the last month.

“The Greek banks are already losing deposits,” Lachman said. “And if they continue to lose deposits at this kind of rate, we could have a financial crisis by [the end of] February and that would really force the Greeks’ hand, if they’re going to be getting any sort of assistance from their European partners.”

Because the far-left Syriza party won just short of an outright majority in parliament, Tsipras formed a potentially fragile coalition with the far-right Independent Greeks party.  The single issue that unites them is opposition to austerity measures for Greece that supplement the economic reforms analysts say are crucial to the country’s revitalization.

Europe rejects debt forgiveness

The troika and the 19-member euro currency zone’s major economic powers oppose debt forgiveness for Greece, something on which Athens seems to have softened its rhetoric.

“Germans in particular are very opposed to any forgiveness of the debt,” economist Desmond Lachman said.  “One of the reasons is that if one forgives the debt, what this would mean is that one would have to go back to one’s electorate and tell them that it was actually costing taxpayers money, that so far what have been doing is keeping up a pretense that the loans that were extended to Greece were going to be repaid and that it wouldn’t be a hit to the German taxpayer.

“Now, if one writes down that debt officially, then what one’s got to do is recognize that one’s not going to get repaid and that could really strengthen the forces in Germany against future bailouts against wanting to provide any sort of assistance to the rest of the Eurozone,” he said.

Greek crisis has deep roots

Analysts say that structural inefficiencies, political patronage, and low economic productivity and growth have fueled Greece’s downward spiral.

But George Washington University political scientist Harris Mylonas said some blame lies with previous lending practices among European countries.

“It exacerbated things in Greece through cheap loans and easy lending,” he said. “Because of its participation in the eurozone, Greece could borrow money and Greek banks could get money similar to the rates Germany received. As a result, Greeks overspent and over borrowed, and that exacerbated things.

“But the structural problems in the case of Greece go back decades.  It has to do with plenty of tax evasion in Greece and lack of productive investments,” he said. “At the same time, the eurozone and participation in it and the incompleteness of the currency union exacerbated things.”

Mylonas said that the eurozone’s lack of a common fiscal policy and strong political union are problematic, particularly given the vast economic and cultural differences among European countries.

But Nicholas Economides, who teaches economics at New York University’s Stern School of Business, said the Greek economic crisis highlights systemic problems with the euro.

“There are weaknesses in the single currency model because it kind of requires that all countries in the eurozone are more or less of the same productivity and of the same growth over time,” he said. “And that is hard to do.  Greece has really fallen way back.  Over the decade that it has been in the eurozone, it has had much lower productivity gains than the rest of the European Union.

“And so have, to some extent, Italy, Portugal and Spain,” he said.  “So there are issues of various countries not going at the same speed, even if they are going in the same direction.  And that’s going to be a long-term problem of the euro.  There is no easy solution to that.”

Still, what happens in Greece could determine the euro’s fate, analysts say.

The fear, they say, is that of a so-called “contagion” spreading across the eurozone, with Portugal and Spain, and perhaps Italy, wanting to restructure or even write off their governments’ debts, depending on what happens between Greece and its creditors.

“The negotiation will not be just in the economic field or in the finance field,” analyst Mylonas said. “It will be a game of chicken that will be played not only vis-à-vis the [Greek] bailout.  It will be more broadly about what membership in the EU means for a member state.”

Ultimately, the Greek crisis has broad financial implications for the EU.

“You’ve got this real tension in that nobody is really empowered to provide the safety net that allows a country to get through a recession — or in Greece’s case, a depression,” said William Antholis, a foreign policy expert and director of the University of Virginia’s Miller Center.  “That’s the broader economic, constitutional challenge that the EU faces that they simply haven’t addressed.

“They’ve been putting out one fire after another rather than building a stronger federal structure,” he said. “And the challenge for that is that Germany doesn’t want to build that stronger federal structure because they don’t want Northern Europe to be responsible for social safety nets for Southern Europe.”

Athens softens rhetoric

Greece’s finance minister, Yanis Varoufakis, appeared to step back in recent days from Syriza’s hardline campaign rhetoric, when he called for a debt swap, rather than a write down on his country’s financial obligations.

One possible solution, analysts say, would be to trade Greece’s already low-interest debt for interest-free bonds that would come due as the country’s economy grows.  Another proposal would involve the troika issuing debt bonds with apparently no deadline for repayment of the principal.

That, some experts say, would be the same as debt forgiveness.  With both options potentially costing debt holders billions of dollars as opposed to current loan agreements, analysts are divided over whether the troika and countries like Germany would accept the terms.

Greece’s debt is more than 175 percent of its gross domestic product.  Without more privatization of state-owned industries and other economic reforms, analysts question Greece’s ability to repay its debts.  And without economic growth, Tsipras’s ability to fulfill his campaign promise for more government spending on social welfare programs is dubious, they say.

The result could be new Greek elections, and renewed concerns over whether Athens will default on its loans or even leave the eurozone.

Varoufakis met Wednesday in Frankfurt with European Central Bank President Mario Draghi and appealed for help to keep Greek banks solvent.

Varoufakis said he told the bank president that the Greek government has an “utter and unwavering determination that it can’t possibly be business as usual in Greece.” He said Greece is in the midst of “a major humanitarian crisis.”

Varoufakis heads to Berlin on Thursday to meet with German officials, who have been the most insistent on Greece meeting the existing terms of its bailouts rather than easing them.


(Photo: EC Audiovisual Service)