The Greek Debt Interim Agreement


On Friday, February 20, Greece’s Syriza government agreed to a four-month extension of the current debt package that has been in effect since Greece’s last debt renegotiation in 2012, thus agreeing to the main demand of the Troika that it do so as a condition for further negotiations. Some have read this as a sell-out by Syriza of its election promises to reject the austerity measures the Troika established in 2010 and 2012, which have kept Greece in a perpetual economic depression for the past five years. By agreeing to continue current debt arrangements, critics say Syriza has also reneged on its promise to reject the Troika’s previous debt deal. The same critics argue that Syriza should have simply declared no to extending both the current debt package and related austerity measures And if the Troika didn’t like it, so be it—Greece should just leave the Euro currency zone.

By agreeing to a very temporary extension, Syriza has tactically made the smart move. From the very beginning, the Troika’s primary objective has been to extend the current debt and austerity terms in perpetuity. That would mean leaving Greece in depression, having to revisit and renegotiate Greece’s massive debt load of $270 billion (more than its annual GDP) repeatedly every few years, resulting in still more debt and requiring more austerity.

Even if Troika’s representatives knew the arrangement was unsustainable in the long run, they had little choice. With the Eurozone economy in deep trouble, with its widespread economic stagnation, its continuing slide into deflation, the still massive debt owed by its other periphery economies, the rising populist parties on the right and left, growing negative effects on it created by U.S.-induced sanctions on Russia, and the prospect of a bottomless black hole of debt and bailouts in the commitments it has made to lend money to Ukraine—unilateral reductions in prior Greek debt at a single stroke by the Troika are not a prospect the Troika could begin to consider by February 28 or even date in the foreseeable future.

The Troika’s Cliff

The Troika would have instead allowed the Eurozone to go over the cliff after February 28, thus dragging Greece over the cliff with it had Greece rejected an extension outright and left the Euro on March 1.

February 28 was simply not enough time for the complex bureaucratic political and banking interests behind the Troika to agree to anything representing fundamental change in Greece’s debt and austerity measures. Nor was it enough time for Greece to prepare for the worst—i.e. an exit—or to develop a more effective strategy in confronting the Troika by seeking allies and support within the Eurozone. Declaring an end to debt payments, to austerity in general, and exiting the Euro would have been committing a fundamental error of confusing a tactic (leaving the Euro) with a strategy (ending austerity).

Had Greece left the Euro, the economic effects of that precipitous move were already becoming apparent: capital flight out of Greece was already accelerating, pressures for a run on Greek banks within days were growing, rates on Greek debt were escalating rapidly, and prospects of runaway inflation rising. All the above would have intensified post February 28. Unknown political consequences would undoubtedly have arisen. It’s likely that the U.S. and Europe would have unleashed their NGOs and other forces of political destabilization to effect a political crisis and regime change in Greece. It is well-known that U.S. Treasury Secretary Jack Lew, in the week preceding February 20, made direct personal calls to Syriza. No doubt veiled threats, economic and political, were made on behalf of the U.S. banker-political allies in the Troika.

Greece’s choice was: precipitate a crisis on February 28 by declaring an exit from the Euro, without having prepared effectively politically and economically or get whatever minimal concessions it could from the Troika, agree to what it must temporarily agree to for the shortest possible period, and buy time to prepare for a possible Euro exit and line up alternative sources of credit should the worst occur, to prepare the public for the consequences, see what splits can be wedged in the Troika opposition (which had begun to appear) and, in the interim, maneuver to implement whatever initial rollbacks of austerity might be possible as a first step toward a more aggressive program.

Whose United Front?

With regard to the question of Greece possibly leveraging potential differences within the Eurozone, some Euro soft liners had already floated the idea of allowing Greece to swap old bond debt for what is called GDP or growth bonds. In the latter, debt payments would only be made if Greece grew economically in real terms. If no growth, then no debt payments, and suspension of debt payments technically means more funds to reduce austerity. Of course, all that needs to be negotiated and the hardliners—Germany, its central bank allies, the IMF—were opposed to such debt payment adjustments. They know a bond debt swap agreement opens the door to negotiations on some austerity suspensions since it reduces the debt repayments.

It is perhaps notable that the Eurozone Commission, and a number of Euro country finance ministers, are not as hardline as the German central bankers, IMF, and ECB, who gained the upper hand within the Eurozone in the closing weeks of February. But as they continued their hardline opposition, other soft liners suggested other ideas aside from GDP bond debt swaps designed also to lower debt payments by extending the loans for 50 years, or even in perpetuity. That, too, would lower annual debt payments and take some pressure off of austerity in the short run. Others were suggesting converting the bonds’ current principal and interest payments to interest payments only, with the same potential result. So there is no united front within the Eurozone.

Minimizing or somehow postponing debt payments by any of the above adjustments raises the possibility for austerity roll backs. Opening the door wider to enable even more rollbacks is also potentially possible if Greece can negotiate a reduction in the stringent national budget surplus now dictated by the current agreement.

With regard to this latter point, several Eurozone countries and their current centrist social democratic parties, specifically France and Italy, have been campaigning for a reduction in their annual budget surplus targets their previous even more pro-banker governments had agreed to. That surplus of 3 percent to 4 percent or so, in effect meant France/Italy would have to cut government spending at a time when their economies are stagnating or in recession. Both, therefore, want to increase government spending to generate more growth. But they recognize that is not possible without a reduction of their current budget surplus target. But if France and Italy prevail in reducing their target, then why not Greece? And why wouldn’t Greece seek allies and support from France and Italy? Reducing Greece’s budget surplus target would, in effect, free up more government revenues to reduce austerity—by hiring back government workers, not cutting or even restoring pensions, improving health care services, not having to privatize electricity services, and so on.

Greece, therefore, needed time to court the doves in the Eurozone centrist governments and to encourage allies willing to propose alternative measures that would reduce debt payments. If the Troika’s number one demand has always been to extend the past agreement of debt terms and austerity as is, then Greece’s number one demand has been to roll back austerity. The bargaining clash between the Troika and Greece leading up to February 20 was about which demand would be primary. Who’s agenda would drive negotiations. The Troika saw austerity as a necessary outcome of its primary objective of ensuring debt repayment; Greece saw debt repayment as the unnecessary requirement preventing its primary objective of austerity roll back. For the Troika, it’s about continuing debt payments and then talking about austerity changes; for Greece, it’s negotiating austerity changes first and then adjusting debt payments to accommodate those changes.

Greece’s Debt Extension Acceptance Letter

So, post-February 28, whose primary position was at the top of the negotiating agenda? Has either side succeeded in dominating the agenda? The answer is no. Although only the outlines of the extension agreement are thus far available, it appears the letter Syriza sent to the Troika on February 23 included the following: First, the Troika got its extension of current terms, its primary demand, but only for four months. In the meantime, in its agreement letter, Greece left hard numerical details purposely vague. It reportedly has two months to clarify the details. Greece can proceed with rolling back austerity measures, albeit more slowly and carefully, even though it may have agreed in  principle not to.

What is the Troika going to do if Greece leaves the extension vague, giving itself room to maneuver at home to continue to reduce austerity in the interim? Will the Troika throw Greece out of the Eurozone because it doesn’t like the lack of details? Break off negotiations? That would have repercussions, both economically and politically throughout the Eurozone and the Troika knows it. They’ll bluster and complain, posture in the media, they’ll threaten not to provide the bridge loans technically due Greece under the old terms during the extension, but in the end they’ll continue negotiations as they really have no other alternative.

In the meantime, Greece will focus on and point to its aggressive efforts to raise taxes by cracking down on the wealthy tax evaders and tax collection corruption. It will cite these aggressive efforts called for in the agreement letter of February 23, as evidence it is proceeding to implement some of the terms of the extension. Greece’s acceptance letter also indicates it will proceed with demanded government reforms to root out corruption, make government funding projects more transparent, and reduce the influence of Greece’s economic oligarchs who have shielded themselves politically the past five years from any austerity effects while the rest of the country bears the burden of the same. That, too, will be held up as evidence of compliance.

Troika demands for labor market reforms—a program the Euro bureaucrats and bankers are pushing throughout the Eurozone—are tactically addressable by Syriza as well. It can say it is refunding pensions from increasing tax collections on the wealthy that have been effectively avoiding them and by other administrative reforms. It can point to hiring back government workers by reducing pay for top government bureaucrats and managers and by other plans to streamline government which the Troika has demanded. It can raise the minimum wage and restore collective bargaining, noting these measures affect the private sector and don’t raise government spending; in fact, rising wages mean more tax payments and therefore more potential government surplus.

Greece’s February 23 letter apparently agreed not to roll back privatizations that have been already completed or under way. But the definition of the latter is not spelled out and those projects can be effectively placed on hold for at least four months or more. And it has not agreed to continue with the privatizations the Troika wants, such as the electricity system, a project that would certainly impact households and incomes. They will be reviewed on a case by case basis, according to the letter. That means, effectively, nothing to be done for another four months. In short, no rollbacks of past privatizations in exchange for a freeze on anything further.

In its letter, Greece also indicated it will proceed with promises to reduce food costs, health care services, and utility services for the poorest, which now constitute a large part of Greece’s households after five years of depression. It indicated the funding for these anti-austerity measures, which amount to around $2.15 billion, will be financed from other cost savings.

Notably, much of the social benefit and program measures will be financed not by budget cuts but by finding cost savings. That means provide the benefits and then look for ways to cut costs. That’s a dramatic departure from the Troika’s procedures of cut first and then adjust the benefit levels.

Need for Continued Solidarity

In the days following Greece’s acceptance letter, the hardliners within the Troika—Germany, its northern Europe central bankers faction, together with the IMF and ECB—have insisted that Greece provide more details in its letter. In contrast, the European Commission and a number of finance ministers have assumed a different public line. As the European business weekly, the Financial Times, reported on February 25, “Officials at the third bailout monitor, the European Commission, said the reform list had improved on outlines discussed at the weekend and, unlike the IMF and ECB, gave it unequivocal support.” So is the IMF and ECB playing hard cop while the EC the soft cop? Or is the EC’s $142 billion Greek debt being considered, whereas the IMF’s and ECB’s smaller debt is not even in question? Only time will tell. But the point is that Greece and Syriza have at least bought that time to find out, to prepare, and have, in the meantime, not really abandoned their primary goal of rolling back austerity.

Greece and Syriza have not sold out. To declare such is premature at best and counterproductive politically at worst. Yes, Greece blinked at the February 28 deadline. If it hadn’t what would have been the consequences? The Troika, with its eyes wide shut, would have gone over the cliff and dragged Greece, and perhaps the entire Euro currency union, with it. Greece and Syriza have thus, in effect, led it, the Troika, and the Eurozone, back from the precipice. Syriza’s severe critics should assess the situation as it is, instead of just declaring all is lost. Negotiations are not over, they have just begun. And so has the fight. Meanwhile, it is too early to throw much needed solidarity overboard. As workers know, when their bargaining team goes into negotiations, you don’t declare sellout and split your ranks even before you’ve gone out on strike. There’s ample time to better determine if that bargaining team’s doing its job.

Z

 

Jack Rasmus is the author of the forthcoming Systemic Fragility in the Global Economy (Clarity Press, 2015) and Epic Recession: Prelude to Global Depression and Obama’s Economy: Recovery for the Few. He blogs at jack rasmus.com.