Yanis Varoufakis in a Sting Exclusive: “Unsustainable debt turns the creditor into Leviathan; Life under it is becoming nasty, brutish and short”

Yanis is having a tough time in holding both his back pack and this one paper at the same hand. This paper would seem to be part of the then draft agreement edited and highlighted. The reason Mr Varoufakis is joggling with one back pack and one paper at the same hand is obviously to get even more media attention. The move had certainly its semantics, at least for the the holder, and shows how Mr Varoufakis speaks the media language. Yanis Varoufakis is the Former Finance Minister of Greece and currently member of the Greek Government and Parliament (TV Newsroom Consilium, 25/06/2015)

Yanis is having a tough time in holding both his backpack and this one paper at the same hand. This paper would seem to be part of the then draft agreement edited and highlighted. The reason Mr Varoufakis is joggling with one backpack and one paper at the same hand is obviously to get even more media attention. The move had certainly its semantics, at least for the holder, and shows how Mr Varoufakis speaks the media language. Yanis Varoufakis is the Former Finance Minister of Greece and currently member of the Greek Parliament (TV Newsroom Consilium, 25/06/2015)

The Lethal Deferral of Greek Debt Restructuring

Written by Yanis Varoufakis

ATHENS – The point of restructuring debt is to reduce the volume of new loans needed to salvage an insolvent entity. Creditors offer debt relief to get more value back and to extend as little new finance to the insolvent entity as possible.

Remarkably, Greece’s creditors seem unable to appreciate this sound financial principle. Where Greek debt is concerned, a clear pattern has emerged over the past five years. It remains unbroken to this day.

In 2010, Europe and the International Monetary Fund extended loans to the insolvent Greek state equal to 44% of the country’s GDP. The very mention of debt restructuring was considered inadmissible and a cause for ridiculing those of us who dared suggest its inevitability.

In 2012, as the debt-to-GDP ratio skyrocketed, Greece’s private creditors were given a significant 34% haircut. At the same time, however, new loans worth 63% of GDP were added to Greece’s national debt. A few months later, in November, the Eurogroup (comprising eurozone members’ finance ministers) indicated that debt relief would be finalized by December 2014, once the 2012 program was “successfully” completed and the Greek government’s budget had attained a primary surplus (which excludes interest payments).

In 2015, however, with the primary surplus achieved, Greece’s creditors refused even to discuss debt relief. For five months, negotiations remained at an impasse, culminating in the July 5 referendum in Greece, in which voters overwhelmingly rejected further austerity, and the Greek government’s subsequent surrender, formalized in the July 12 Euro Summit agreement. That agreement, which is now the blueprint for Greece’s relationship with the eurozone, perpetuates the five-year-long pattern of placing debt restructuring at the end of a sorry sequence of fiscal tightening, economic contraction, and program failure.

Indeed, the sequence of the new “bailout” envisaged in the July 12 agreement predictably begins with the adoption – before the end of the month – of harsh tax measures and medium-term fiscal targets equivalent to another bout of stringent austerity. Then comes a mid-summer negotiation of another large loan, equivalent to 48% of GDP (the debt-to-GDP ratio is already above 180%). Finally, in November, at the earliest, and after the first review of the new program is completed, “the Eurogroup stands ready to consider, if necessary, possible additional measures… aiming at ensuring that gross financing needs remain at a sustainable level.”

During the negotiations to which I was a party, from January 25 to July 5, I repeatedly suggested to our creditors a series of smart debt swaps. The aim was to minimize the amount of new funding required from the European Stability Mechanism and the IMF to refinance Greek debt, and to ensure that Greece would become eligible within 2015 for the European Central Bank’s asset-purchase program (quantitative easing), effectively restoring Greece’s access to capital markets. We estimated that no more than €30 billion ($33 billion, or 17% of GDP) of new, ESM-sourced financing would be required, none of which would be needed for the Greek state’s primary budget.

Our proposals were not rejected. Although we had it on good authority that they were technically rigorous and legally sound, they simply were never discussed. The political will of the Eurogroup was to ignore our proposals, let the negotiations fail, impose an indefinite bank holiday, and force the Greek government to acquiesce on everything – including a massive new loan that is almost triple the size we had proposed. Once again, Greece’s creditors put the cart before the horse, by insisting that the new loan be agreed before any discussion of debt relief. As a result, the new loan deemed necessary grew inexorably, as in 2010 and 2012.

Unsustainable debt is, sooner or later, written down. But the precise timing and nature of that write-down makes an enormous difference for a country’s economic prospects. And Greece is in the throes of a humanitarian crisis today because the inevitable restructuring of its debt has been used as an excuse for postponing that restructuring ad infinitum. As a high-ranking European Commission official once asked me: “Your debt will be cut come hell or high water, so why are you expending precious political capital to insist that we deliver the restructuring now?”

The answer ought to have been obvious. An ex ante debt restructuring that reduces the size of any new loans and renders the debt sustainable before any reforms are implemented stands a good chance of crowding in investment, stabilizing incomes, and setting the stage for recovery. In sharp contrast, a debt write-down like Greece’s in 2012, which resulted from a program’s failure, only contributes to maintaining the downward spiral.

Why do Greece’s creditors refuse to move on debt restructuring before any new loans are negotiated? And why do they prefer a much larger new loan package than necessary?

The answers to these questions cannot be found by discussing sound finance, public or private, for they reside firmly in the realm of power politics. Debt is creditor power; and, as Greece has learned the hard way, unsustainable debt turns the creditor into Leviathan. Life under it is becoming nasty, brutish and, for many of my compatriots, short.

Yanis Varoufakis, a former finance minister of Greece, is a Member of Parliament for Syriza and Professor of Economics at the University of Athens. Copyright: Project Syndicate, 2015.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

Snowden is the “EU nomination” for this year’s Oscars

Four things Turkey did for business in the G20

Is the EU competent enough to fight human smuggling in 2015?

Legal Manager – 2050

Commission deepens criticism on German economic policies

Draghi: printing a full extra trillion non negotiable to help all borrow cheaply

“Only through energy policy we can trigger competitiveness”. The Sting live from #EBS2015: Energy Union – When will it happen?

The EU Commission openly repudiates the austere economic policies

EU-US trade agreement talks to be affected by American bugs

Should Europe be afraid of the developing world?

“Private” sea freight indexes hide Libor like skeletons?

South Eurozone urgently needs fairer distribution of taxation burden

Schengen is losing ground fast revealing Europe’s clear inability to deal with migration crisis

Eurozone in trouble after Nicosia’s ‘no’

The European Union’s Balkan Double Standard

Rising political extremism in Europe escapes control

Digital business is Europe’s best hope to get back to growth

Eurozone bank rescues ‘a la carte’ until 2015 then only bail-ins

The Eurogroup offered a cold reception to IMF’s director for Europe

GSMA Mobile 360 Series – Europe – 14 June 2016

Eurozone: A crucial January ahead again with existential questions

2016 crisis update: the year of the Red Fire Monkey burns the world’s markets down

EU: Protecting victims’ rights from cartels and market abuses

daniela-runchi-jade-president__

A Sting Exclusive: “Education in Europe, fostering skills development inside and outside the school system”

Mood changes in Europe in favour of growth and jobs

Is “Sustainable Development” a concept that integrates Health Literacy and Health Policy as a global health action?

EU Parliament raises burning issues over the FTA with the US

Spirit unlimited

Except Poland, can climate change also wait until 2021 for the EU Market Stability Reserve to be launched?

EU economic governance: More exploitation for the weaker countries

eGovernmnet for more efficiency, equality and democracy

Trump enrages the Europeans and isolates the US in G7

A Sting Exclusive: “On the road to Japan-EU Economic Partnership Agreement”, by Ambassador Katakami of the Japanese Mission to the European Union

ECB’s unconventional monetary measures give first tangible results

Trump ostracized by his party and world elites but still remains in course; how can he do it?

COP21 Breaking News_09 December: The Draft Agreement Updated

WEF Davos 2016 LIVE: “CO2 is not the problem, it is the symptom”, the pilots who crossed the world using solar energy cry out from Davos

EU: Centralised economic governance and bank supervision may lead to new crisis

The German banks first to profit from public subsidies of trillions

COP21 Breaking News_10 December:#ParisAgreement: Points that remain in suspense

Russia and the West to partition Ukraine?

COP21 Breaking News: “We must accelerate the process”, Laurent Fabius cries out from Paris

Ukraine undecided over a strategic partnership with the EU

The EU pollution rights trading system frozen

COP21 Breaking News_07 December: “The world is expecting more from you than half-measures”, UN Secretary General Bank Ki-moon cries out from Paris

G20 LIVE: World Leaders in Turkey for G20 Summit. Global Economy will be discussed in Antalya

Eurozone: How can 200 banks find €400 billion?

Greece to stay in the euro area but the cost to its people remains elusive

Will the Greek economy ever come back to growth?

Any doubt?

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s