WHO WILL BLINK NOW SYRIZA HAS WON ? / THE FINANCIAL TIMES

January 26, 2015 7:17 am

 

Who will blink now Syriza has won?

 

George Magnus

 

A new chapter of European instability is only just beginning, writes George Magnus

 

©Getty

 

Three years ago, Syriza was only just recognisable as a modern political party. Today it is the new government of Greece, perhaps even with an overall majority in the legislature.

 

To implement its ambitious economic renewal programme, the party believes Greece must renegotiate debt arrangements and conditions with its creditors: the so-called “troika” of the European Commission, the European Central Bank and the International Monetary Fund. It has pledged to stop what Alexis Tsipras has called the “fiscal waterboarding” policies that have turned Greece into a debt colony and created widespread poverty and unemployment. In what promises to be the first serious clash between creditors and a sovereign debtor since the eurozone crisis began, someone is going to blink. But who, and with what implications?

The new government and its creditors do not have a lot of time, or much in common. Talks will have to start quickly on outstanding loan and repayment issues which fall due by March 1, and again in July and August, but these are more about process than substance.

The critical issue in the forthcoming negotiations is that a Syriza-led government will be quite unlike its predecessors, which had significant factions whose political interests were fundamentally aligned with those of the troika and with the basic thrust of austerity. Syriza has made no secret of its visceral opposition to the conditions that have been accepted until now.

It is possible that some sort of compromise could be reached over the terms of Greece’s debt, which stands at €317bn, or 175 per cent of gross domestic product. Roughly 80 per cent of debt is owed to the troika, and earlier restructuring has lengthened the average debt maturity to more than 16 years, with an effective interest rate of 2.4 per cent. Nevertheless, the burden of debt in a deflationary, slow-growth economy remains heavy.

 

Some creditors have already ruled out the demand for a write-off of much of the debt outstanding. But this and other possibilities could be explored, such as a clause that would tie residual debt servicing to realised rates of economic growth, even longer maturities, a lengthy grace period before debt servicing recommences, and some relaxation of the treatment of public investment in the Stability and Growth Pact rules.

Yet it is the concessions regarding austerity and the conditionality of the loan agreements that are likely to be the greater sticking point. No further major reductions in public spending are planned under existing programmes but tax and revenue increases are still expected to sustain austerity in an economy that remains in depression.

Syriza has had enough. It has declared the humanitarian crisis in housing, heating and food deprivation a priority, and intends to then act to restore economic growth, increase job creation, the minimum wage and pensions, and improve the collection of taxes and tax arrears.

Berlin and Brussels are likely to insist that Greece persist on its current course and implement already agreed policies, perhaps with tweaks here and there. A leading concern is to avoid the kind of concessions on debt terms and conditions that could give rise to claims for similar treatment elsewhere, including Spain, where Podemos, sympathetic to Syriza, leads the opinion polls in important national elections later this year. However, in creditor-debtor politics, the balance of advantage sometimes swings to the latter after a period of hardship and submission, as debtors gradually get their financial sea legs and political confidence back.

 

Greece may be approaching just such a point. Its budget deficit has just about been eliminated, while the primary balance, that is excluding interest payments, is predicted by the IMF on various measures to be between 3 and 5 per cent of GDP in 2015. Greece also has an external surplus of about 1 per cent of GDP, compared with a deficit of over 14 per cent in 2008-09.

It is hard to predict who will blink. A further and dangerous uncertainty arises from the condition of Greek banks, which had been experiencing deposit outflows before the election, and which remain dependent on nearly €50bn of Emergency Liquidity Agreement financing from the Bank of Greece, as approved by the ECB.

If Greece pushed its demands too far, approval could be withdrawn, triggering a new banking and economic crisis. The ECB could hardly approve loans, where the Greek government guarantor was attempting to dilute or cancel conditions. This could bring the Greek government down, lead to the imposition of capital controls, and in extremis provoke a political row that ended up finally in most people’s nightmare of Greece questioning continued eurozone membership. But the ECB, now doing QE, would hardly want to precipitate such an outcome.

 

The most we can say is that if Greece’s creditors blink, the significant demonstration effect to the rest of the eurozone will give rise to economic relief in the south and angst in the north, hardly furthering the cause of political unity. If Greece does, leaving its economic renewal programme toothless, the eurozone’s narrative of mistrust between north and south will intensify with dangerous political consequences.

Syriza has won an important victory, but a new chapter of European instability is only just starting.


The writer is an economic consultant and former chief economist to UBS