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

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

A Sting Exclusive: EU Commission’s Vice President Šefčovič accentuates the importance of innovation to EU’s Energy Union

Brexit is happening now but the UK hasn’t really assessed the impact of a “no-deal” divorce

Who can compel Wallonia to unlock CETA, the EU-Canada free trade pack?

Draghi strives to control the unruly exploitation of financial markets by banking leviathans

EU Youth Conference in Riga concludes with recommendations for ministers

Is Europe ready to cooperate with the rest of the world? Can Germany change its selfish policies?

Does the Commission subsidise a forced labour scheme in Britain?

Predatory labour taxation not an issue for the Commission

Eurozone: The cycle of deficits, debts and austerity revisited

US, Russia oblige each other in Syria and Ukraine selling off allies

Mobile World Congress 2015 first to debate EU’s new stance on Net Neutrality and Roaming Charges

A Sting Exclusive: Towards better business opportunities for the EU and its neighbours, Commissioner Hahn live from European Business Summit 2015

ITU Telecom World 2017 on 25-28 September in Busan, Republic of Korea

MasterCard @ MWC14: Innovation in times of regulatory uncertainty

Social Committee slams the 28 EU leaders for false promises

The EU responds to US challenges by fining Apple with €13 billion

European Youth Forum on Summit on Jobs and Growth

Macron has the deputies but not the people’s consent for his far reaching reforms

EU’s new environmental policy on biofuels impacts both the environment and the European citizen

Youth Forum welcomes positive ruling on non-EU student visas

Why David Cameron’s large victory in UK elections will not pursue a ‘Brexit’

EU to Telcos: Stop Mergers and Acquisitions but please help me urgently with 5G development

Medical Education is #NotATarget

A day in the life of a Venezuelan migrant in Boa Vista, Brazil

Asking for more restriction on intra EU immigration: Unproductive and politically dangerous

Climate change: Will COP23 be able to accelerate the implementation of the Paris agreement?

Yanukovych attempts a violent and deadly cleansing of Kiev’s center

Eurozone’s sovereign debt not a problem anymore?

Terrorism and migrants: the two awful nightmares for Europe and Germany in 2016

EU ready to relinquish its internal tax havens

European Union disenchanted with Turkey

CDU-SPD agree the terms for EU’s Banking Union

May a parody constitute a copyright infringement? European Court of Justice to give the answer

Britain, EU take edgy steps to unlock Brexit talks as the war of words rages

Stricter rules and tougher sanctions for market manipulation and financial fraud

Obama turns the G20 summit into warmongering platform

EU’s guidelines on net neutrality see the light although grey areas do remain

Medical Doctors in Industry 4.0: pure science fiction

Apple’s tax avoidance scheme remains as creative as their new iPhone

Chatterbox Rome Declaration cannot save the EU; Germany has to pay more to do that

Cross-roads

The inhumane face of crisis mirrored in numbers

“The winner is who can accelerate the transition to a new digital era”. The Sting reports live from EBS 2015: a Digital Europe 4.0

Parliament ready to fight for a different EU budget

Donald Trump’s victory is a great opening for global EU leadership on the sustainability agenda

COP21 Breaking News: Paris Pact on Water and Climate Change Adaptation Announced

EU Commission: The banks are not obliged to finance the real economy

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

Do academia and banks favour a new Middle Ages period?

Internet of Things: a Force for Good or Evil?

Youth policy in Europe not delivering for young people

Why Indian students are going abroad to become Doctors?

Ukraine: Is there a political force able to undo the division?

EU and Japan agree on free-trade deal and fill the post-TPP void

Eurozone: A Sluggish economy offers no extra jobs

Horse meat runs faster than authorities…

Migration crisis update: The “Habsburg Empire” comes back to life while EU loses control

Brussels wins game and match in Ukraine no matter the electoral results

A European young student speaks about the Youth Policies of the European Commission

EU makes key TTIP document public as protests get louder

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