In May 2010, the Eurozone crisis began with turmoil in Greece. In spring 2012, new turmoil in Greece will frame the end-game of the Eurozone itself.
On January 16, the representatives of the “Troika” – the European Union, International Monetary Fund and the European Central Bank – will return to Greece to restart talks with the Greek government on the next loan contract.
"We must see progress on the voluntary restructuring of Greek debt," German Chancellor Angela Merkel told a joint news conference with French President Nicolas Sarkozy in Berlin in January 9. “Otherwise it won't be possible to pay out the next tranche for Greece."
This tranche amounts to EUR 130 billion, and the Greek economy is critically dependent on it.
In the absence of radical policy shifts, Athens is heading toward default.
Few options left
The prospects for cash-strapped Greece look increasingly bleak. Nonetheless, the Troika and the current Greek government hope to stick to the current strategy, which is likely to contribute to continued downward slide – for the fifth year in the row.
Again, there are three options on the table: tougher austerity measures, larger debt restructuring, or additional funds.
If the Troika asks the Greeks to impose even tougher austerity measures and Athens goes along, any lingering hopes for growth will be extinguished and social tumult will escalate. If Athens decides to oppose new austerity measures, the dispute over the next tranche will force the default sooner rather than later.
The other option – that the country’s creditors should provide Greece with additional funds– is no option at all. In the absence of substantial policy shifts, political obstacles against additional funds are growing rapidly in the recessionary environment of the Eurozone.
What about the third option?
Running behind haircuts
Since spring 2010, I, along with others, have spoken for debt restructuring in Greece. For two years, the ECB and most euro leaders shunned all talk about Greek debt restructuring. When the idea was presented to the then-ECB chief Jean-Claude Trichet, he walked out.
Last summer, the euro leaders finally did conclude that Greece probably needs a 21% debt reduction. However, time is money and that was too little too late. By then, the more realistic figure was closer to 50%.
In the fall, the euro leaders concluded that, actually, what is really needed is a 50% haircut. But precious time had been lost again, and by then the real figure was close to 70-75%.
Today, a 50% debt restructuring in Greece is grossly inadequate. What is needed is probably an 85-90% haircut.
What went wrong?
The simple answer has to do with assumptions. In May 2010, the Eurozone supported Greece with EUR 110 billion; last year Athens hoped to stay afloat with another bailout round of EUR 109 billion. But neither was sufficient.
In October 2011, the Troika concluded in its debt sustainability study that Greece would need another EUR 250 billion in the course of the next decade. At the time, I argued that, given the current policy packages, this was neither viable nor enough.
The IMF and the EU determined that Greece’s debt would have to be cut from more than 160% to 120% of GDP to be sustainable. And yet, only weeks after the Troika study, Italy, a major Eurozone economy, was swept by market turmoil, even though its debt-to-GDP was 120%.
As far as the Troika was concerned, Athens’ best option was a decade of nightmarish austerity programs that, at best, would result in the kind of market turmoil that had just swept the Italian economy.
The simple fact remains that, in order to gain control of the expenditures in the Greek budget and the country’s debt, current revenues would have to exceed expenditures by more than 10% - and that is a figure that not a single industrialized country has achieved in recent past.
Greece as an emerging economy
In other words, when the most recent Greek restructuring program was approved in last fall, it was dead on arrival.
The initial decision to grant Greece membership in the Eurozone was motivated by political considerations, not economics.
In the absence of drastic policy shifts, the final decision to permit Greek exit is likely to be motivated by economic considerations, not politics.
When the Greek government has to face a choice between a decade of austerity and an Eurozone exit to regain competitiveness, the chances are that the government will choose the latter.
In structural terms, the indebted-Greece looks today like an emerging economy. However, this outcome was neither necessary, nor inevitable.
A more realistic approach would have spared the Greeks of unnecessary suffering and the Eurozone from unnecessary escalation and contagion.
Dan Steinbock is research director of International Business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore).