Yanis Varoufakis: “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

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Indian cities are running out of water

How the digital finance revolution can drive sustainable development

Yemen: UN Envoy ‘guilty’ of optimistic hope that war is ‘nearing the end’

Reintegrating former rebels into civilian life a ‘serious concern’ in Colombia: UN Mission chief

World Economic Forum launches COVID Action Platform to fight coronavirus

Merkel: Nationalism and egoism must never have a chance again in Europe

How tiny countries top social and economic league tables (and win at football, too)

Some endangered languages manage to thrive. Here’s how

Business leaders join UN to rev up sustainable development investments

Monday’s Daily Brief: Earth Day, looking for a solution to Libya crisis, focus on indigenous issues, Security Council on Sri Lanka, a high-level visit to Bangladesh

How to unleash the enormous power of global healthcare data

25 years on from genocide against the Tutsi, UN Chief warns of ‘dangerous trends of rising xenophobia, racism and intolerance’

Migration and rule of law on next ACP-EU Parliamentary Assembly agenda

‘Let the children live’: UN prepares to ramp up food aid to Yemen as famine risk grows

Malaysia can show the way towards a holistic model for human rights

EU Banks still get subsidies from impoverished citizens

The unpleasant truth of plastic straws

Everyone’s ‘buy-in’ needed to restore peace in Kosovo, UN envoy tells Security Council

The European Parliament fails to really restrict the rating agencies

UN, Somali Government seek $80 million in immediate relief for flood-affected populations

No agreement in sight on EU budget

Humanitarian aid: EU announces additional €35 million for Africa’s Sahel region

Grave concern over escalating humanitarian crisis, casualties, displacement across northwest Syria: UN

Tokyo Olympics postponed to 2021 over coronavirus concerns

How video games can reunite a divided world

Human rights: breaches in Russia, the Rakhine State and Bahrain

Entrepreneurship and strategic planning: the enabler

ITU Telecom World 2016: it’s all about working together

Eurozone slowly but surely builds its Banking Union

The US and EU decisively oppose Erdogan’s plans for Turkey and beyond

G20 LIVE: “Re-envisioning the economy to enable women to reach their full potential” live from Antalya Turkey

More than half a million Rohingya in Bangladesh get ID cards for first time: UN refugee agency

Do electronic cigarettes produce adverse health effects?

Germany resists Macron’s plan for closer and more cohesive Eurozone; Paris and Berlin at odds

Three ways batteries could power change in the world

How secure is blockchain?

3 reasons why data is not the new oil – and why this matters to India

The deforestation risks lurking in the banking sector

Australia’s bushfires have pumped out half a year’s CO2 emissions

Chart of the day: The internet has a language diversity problem

Can the national and age groups pockets of unemployment cause irreparable damages to Eurozone?

Austria: reforms will be necessary to uphold high well-being levels

Erdogan’s Turkey in dire straits for flip flop policies in the Middle East

Europe rethinking its severe austerity policies

COP25: Developing nation’s strike hard

‘Embrace the transformation’ to a carbon-neutral world by 2050, UN chief tells COP25

How tech can help businesses balance profit and purpose

Plastic Oceans: MEPs back EU ban on polluting throwaway plastics by 2021

Main results of Foreign Affairs EU Council, 16/07/2018

UN working to prevent attacks on civilians in eastern DR Congo

How do we make artificial intelligence more humane?

Eurostat overturns Commission’s assessment of the economy

The missiles fired against Damascus, Syria divided Europe deeply

Vital food crops destroyed in Syria amid upsurge in fighting across Idlib, Hama

New SDG Advocates sign up for ‘peace, prosperity, people’ and planet, on the road to 2030

Rare earths are the new battlefront in the US-China trade war. But what are they?

How the inventor of the internet plans to make it safe and accessible for everyone

UN experts voice ‘deep concern’ over Iran’s ‘consistent pattern’ of denying life-saving medical treatment to detainees

These countries are pioneering hydrogen power

COP21 Breaking News_08 December: Cities & Regions Launch Major Five-Year Vision to Take Action on Climate Change

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 )

Google photo

You are commenting using your Google 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 )

Connecting to %s