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

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

Syria: Civilians caught in crossfire, UN refugee chief urges Jordan to open its border

A Sting Exclusive: “There can be no global deal on emissions without China and the USA”, Conservative MEP Ian Duncan stresses from Brussels

Vendor Pulse – 2000

Eurozone: Subdued inflation can lead to more recession

A rapid deterioration of the humanitarian situation in the war-torn Yemen

Girls still being treated as aliens in medicine in the 21st century

Statement by the Brexit Steering Group on UK paper on EU citizens in the UK

Europe on the Move: Commission completes its agenda for safe, clean and connected mobility

Bayer’s cross at night (Copyright: Bayer AG)

The EU clears Bayer-Monsanto merger amid wide competition and environmental concerns

A European student just sets the question of the day: What kind of education policies are missing in Europe?

ECOFIN: Choosing between the re-unification of Eurozone and a stalemate

Millions of young lives ‘at risk’ says UN labour chief, calling for an end to child labour

JADE Testimonial #3: Sebastian @ Fundraising

First-ever EU defence industry fund to finance joint development of capabilities

Trump stumbles badly on his Russian openings; Europeans wary of Putin

A Sting Exclusive: “One year on from the VW scandal and EU consumers are still in the dark”, BEUC’s Head highlights from Brussels

Will the European Court of Justice change data privacy laws to tackle terrorism?

“C’est la vie”? French recession and unemployment to linger in Eurozone

ECB: Growth measures even before the German elections

UN official sees ‘unprecedented opportunities’ to make progress on peace in Afghanistan

Happens now in Brussels: Green Week sets the EU and global climate policy agenda

The “Legend of the Sun” wishes you Happy Chinese New Year 2015 from Brussels

MWC 2016 LIVE: The top 5 themes of this year’s Mobile World Congress

Merkel, Mercedes and Volkswagen to abolish European democracy

Ahead of State of the Union the European Youth Forum highlights lack of action on youth employment

On Google antitrust case: “Let’s face it, some companies want to hurt Google and it goes as simple as that”

The South China Sea Arbitration: Illegal, Illegitimate and Invalid

Employers’ organizations work towards improving the enabling environment for sustainable enterprises

A Sting Exclusive: “Climate change and youth inaction: oblivion or nonchalance?”, AIESEC wonders from Brussels

“A global threat lies ahead worsened after the EU’s green light to the Bayer-Monsanto merger”, a Sting Exclusive by the President of Slow Food

Professional practices of primary health care for Brazilian health and gender inequality

MWC 2016 LIVE: Getty chief says one in four new images from phones

The widely advertised hazards of the EU not that ominous; the sting is financial woes

In Finland, speeding tickets are linked to your income

Two shipwrecks add to ‘alarming increase’ in migrant deaths off Libya coast: IOM

Entrepreneurship’s key to success showcased by a serial young entrepreneur

MEPs call on EU countries to end precarious employment practices

Refugee crisis update: EU seeks now close cooperation with Africa while Schulz is shocked to witness live one single wreck full of immigrants

The EU Parliament unanimously rejects Commission’s ideas about ‘seeds’

The role of public affairs in student NGOs

No end to Deutsche Bank’s problems: new litigations in the US and frailty in EU stress test

The missiles fired against Damascus, Syria divided Europe deeply

UN member states express their will to tackle global migration but specific actions are still missing

Some Prevailing Arguments and Perceptions over the South China Sea Issue Are Simply Wrong

Fear casts again a cold, ugly shadow over Europe; Turkey sides with Russia

Italy’s rescue operation Mare Nostrum shuts down with no real replacement. EU’s Triton instead might put lives at risk

This tool shows you which cities will flood as ice sheets melt

JADE Testimonial #2: Jacques @ Process mapping

Eurozone very close to a sustainable growth path

ILO warns of widespread insecurity in the global labour market

Why Renewable Energy is an attractive investment

Leading Palestinian legislator calls for ‘new international engagement’ in two-state solution

Why the ECB had to clarify it caters for the entire Eurozone not just Germany?

“Leaked” TTIP document breaks post 8th negotiations round silence and opens door to critics

Is poverty and exclusion the necessary price for EU’s recovery?

The Italian ‘no’ and France’s Fillon to reshape Europe; Paris moves closer to Berlin

“Working together to make a change at the COP 21 in Paris”, an article by Ambassador Yang of the Chinese Mission to EU

Germany may have a stable and more cooperative government

Autonomous vehicles could clog city centres: a lesson from Boston

EU and US close to an agreement on data sharing amid European citizens’ concerns

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 )

w

Connecting to %s