Advancing a Free Society

Would You Loan This Man $200 Billion?

Thursday, May 17, 2012

Alexis Tsipras won the Greek elections.  His Coalition of the Radical Left garnered the most votes, and his insistence that the leaders of Greece’s mainstream parties sign a “letter of repentance” for agreeing to the EU bailout prevented formation of a government, necessitating yet another round of elections June 17th.  Nine hundred billion dollars was withdrawn from Greek banks on Monday alone; its credit has been further downgraded “further into junk territory” (as the Wall Street Journal so nicely termed it) in anticipation of Greece abandoning or being forced out of the European Monetary Union.

His party is committed to abrogating the deal whereby Greece reduces its sovereign debt in return for liquidity to get it through near term spending needs.  Near term, in the case of Greek indebtedness, extends to other European countries underwriting Greek debt for the coming decade, including another $220 billion Greece needs by the end of June.

Greece’s leading politician tried his hand at foreign policy yesterday, threatening his lenders with default unless they relax their conditions for Greece to cut its spending and retire its debt.  Tsipras essentially told the Wall Street Journal that unless the EU continued to give Greece money without strings attached, Greece would bring down the entire European banking system.

Specifically, he said “whatever we do, things will be difficult. But it will also be difficult at the same time for all of Europe because the euro will collapse.”  It merits recalling that Greece got into this mess because the government committed fraud by knowingly masking its debts.  Even if Greece proceeds with the stark program of spending reductions agreed to with the EU, Greece’s debt will only be reduced to 120% of GDP by 2020.

At some level, it’s hard not to grudgingly admire someone playing a weak hand so brazenly.  Pair of twos and he’s betting the ranch.  But while antagonizing Greece’s creditors may be good domestic politics, it’s terrible foreign policy.  German taxpayers have not yet been persuaded why they should fund Greeks retiring at younger ages than do Germans.

The odd thing is that the draconian nature of the EU austerity program was going to be soon revisited.  Less out of concern for Greece -- which constitutes only about 2% of the European economy and is widely considered within the EU to be deserving of the pain it is experiencing -- than a wider backlash by electorates against The European Project.

Tsipras seems to think Greece can repudiate the terms of the loans and still remain in the Monetary Union.  He may be banking (excuse the pun) on the push for “growth” -- by which is meant a relaxation of austerity programs, not actual pro-growth economic policies -- having gained enough momentum with the election of President Hollande in France and the fall of the Dutch government that he can talk tough and still get what he wants.

But Greece is not the only country with a restive public, and the likely next prime minister of Greece has just made it more difficult for his colleagues to agree to what he wants.  Mr. Tsipras might want to consider that banks have had two years to shore themselves up for and markets nearly that much time to price in the cost of a Greek default.

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