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APRIL 29, 2015

Is Default or Exit Inevitable?

Greek Debt Crisisby JACK RASMUS

This past week, April 24, European finance ministers met in Riga, Latvia. High on the

agenda was the topic of Greek debt negotiations. Two months after the February 28

interim agreement between Greece and the EU ‘troika’—the IMF, European

Commission, and European Central Bank—in which both sides agreed to continue

negotiating—little has changed. In fact, led by its de facto spokesperson, hardline

German finance minister, Walter Schaubel, the Troika’s position has continued to

harden since February 28.

Schaubel and other northern Europe finance minister have continued to insist for the

past two months that there will be no changes in pre-2014 terms and conditions of debt

payments. The Troika and Schaubel have repeatedly demanded as well, that Greece

provide more details to show how it will continue to pay its debt and how it will

maintain previous austerity measures.

In reply, Greece and Syriza point to the various measures they have agreed to since

February 28, as well as what they agree in principle to implement in the future:

pension reforms that limit early retirement but don’t cut pensions ‘across the board’,

selective privatizations that avoid cutting necessary social services but not general

privatizations, tax reform that make the wealthy pay their fair share, and so on.

While Schaubel and the Troika demand Greece abide by the previous debt agreement,

they themselves refuse to do the same. They refuse to release to Greece the US$8

billion in loans due to Greece under the old terms of the agreement. Or to release to

Greece the US$2 billion in interest earned on Greek bonds earned since 2010. In other

words, Greece must adhere to the letter of the debt agreement but the Troika does not

have to.

Schaubel and other hardliners have become especially incensed with measures

introduced since February 28 by the Syriza-led government, which include the

moderating of some of the worst prior austerity measures. Those austerity-reversing

measures include Syriza’s restoration of minimal pensions for the lowest wage earners,

adjustments to the minimum wage for the working poor, rehiring of critical

government workers to provide much needed social services, reversal of some of the

previously planned privatization of public works, as well as the new Greek

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government’s reaffirming the rights of workers and unions in Greece to collectively

bargain—i.e. all measures that the Greek people once had, that were taken away as part

of the loans by northern bankers before 2014, and which Syriza has restored since

February.

The Ghost of ‘Labor Market Reform’ at the Negotiating Table

These measures are particularly annoying to the northern Europe finance ministers

and their bankers, since other European governments have introduced, or have plans

to introduce, many of the very same ‘labor market reforms’ in their countries.

Deepening labor market reforms everywhere throughout the Eurozone is a prime

objective of business interests and their center-right politicians and governments. They

see ‘labor market reforms’ as the key to lower costs of European exports and a main

way to boost their stagnant economies. Thus to allow Greece to restore—what they

themselves are trying to take away elsewhere from other European workers—provides

a strong argument for unions and popular parties elsewhere in Europe to oppose their

own ‘labor market reforms’. Greece and Syriza are in effect ‘sticking a thumb in the eye’

of key plans by European corporate interests by actually reversing labor market

‘reforms’ that were previously in place. More than Greece has always been at stake in

the debt negotiations.

With Syriza’s selective reforms moderating some of the worst austerity measures,

Schauble and other northern European finance ministers and the bankers became

increasingly impatient in recent weeks, even more demanding, and have begun

adopting an increasingly hardline and aggressive tone against Greece and its ministers.

At the April 25 Riga European finance ministers meeting, for example, according to the

business press, the finance ministers were openly hostile to, and ‘ganged up’ on, Greek

finance minister, Yanis Varoufakis, repeatedly berating him for not agreeing to their

terms.

European Central Bank (ECB) chairman, Mario Draghi, also joined the attack last

week, warning Greece that “time is running out”, and that he may take actions to put

more pressure on Greek banks by limiting Greek banks’ access to ECB loans needed to

ensure availability of Euros for everyday Greek economic use. Draghi was thus, in

effect, threatening to ‘pull the plug’ on Greek banks and send Greece’s economy into a

tailspin. Just the mention of such a threat by Draghi will no doubt accelerate capital

flight from Greek banks, already a growing problem, thus putting even more pressure

on the Syriza government to concede.

Not to be left behind, the other Troika member, the IMF, also turned up the heat on

Greece last week. The chairman of the big Swiss bank, UBS, reported that the IMF

meeting he attended last week discussed a Greek default. There is now a consensus in

the IMF “that a Greek default would be systemically controllable”. There is apparently

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a ‘Plan B’ in the works to allow Greece to default. With the Eurozone having just

introduced a massive US$60 billion a month ‘quantitative easing’ (QE) money

injection by the ECB, the IMF view no doubt is that, in the event of a Greek default, the

US$60 billion a month provided by the ECB would be sufficient to bail out the losses of

northern European bankers—even if Greek banks and the Greek economy were allowed

to crash. Schaubel and the finance minister hard-liners have also been suggesting that

such a Plan B may be in the works.

Plan ‘B’ and Its Consequences

So what’s up? Is the Troika playing ‘chicken’ with Greece? Is Schaubel playing the ‘hard

cop’ in negotiations, with Angela Merkle the ‘soft cop’, now reportedly meeting with

Greek president, Tsipras, on the side? Or is the Troika seriously considering allowing

Greece to default on its payments, thus cutting Greece off from future short term loans

and funding? (And how about a ‘Plan C’? Would the Troika allow the even more serious

alternative of Greece exiting the Euro?)

Playing ‘chicken’ in negotiations over the debt terms may represent a grand strategic

error on the part of Eurozone finance ministers and technocrats. A default may end up

far more messy than they think. The Eurozone may not be economically in a much

stronger position to absorb a Greek default today than it was in 2010 or 2012, despite

the argument to the contrary raised in various Euro-technocrat quarters recently that is

designed to justify letting a default happen. Schaubel, Draghi and others may be

overestimating Europe’s resources and ability to deal effectively with and contain a

Greek default.

Others have been raising this warning as well, especially with regard to a Greek exit

from the Euro. Sensing that Schaubel and company may be about to lose control of the

situation concerning Greek debt negotiations, Jason Furman, chairman of the Obama

Council of Economic Advisers, recently noted in a press interview while in Berlin that a

Greek exit “would be taking a very large and unnecessary risk with the global

economy”.

But even a Greek default might well prove far more destabilizing than assumed.

Schaubel’s assessment, voiced at a meeting of the Council of Foreign Relations in New

York in April, that ‘the markets’ have already priced in the possibility of default, and

thus a Greek default could be contained, may be wishful thinking indeed. It has been

estimated that more than US$250 billion in assets would be eventually affected by a

default, and no one knows the connections linking these assets—i.e. what are the

possible contagion effects. The memory of the Lehman Brothers default in 2008 is

obviously stronger in the USA than it is today in Europe—hence the Furman public

warning. Privately, US officials are even more concerned than Furman, according to

the business press.

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What then are the potential parallels between Lehman Brothers and a Greek default?

Or, even more so, with a Greek exit? In both cases, default and exit, no one knows for

sure with Greece. Any more than they knew with Lehman at the time. Neither the path

nor the magnitude of the contagion effects is clear. The spider web of financial

connections in today’s global financial system is still not well understood. Estimating

the potential psychology of investor responses is almost impossible. And what would be

the political consequences? If Greece left the Euro, would that be a sufficient signal and

excuse for others to do so as well? What would be the economic impact of not just

Greece but another one or two ‘exits’?

Is the Eurozone economy in so much ‘better shape’ today? In terms of stockholders

perhaps. The various Euro stock markets are up by 20-30 percent or more in 2015 as a

consequence of QE. But certainly not the rest of the non-financial, ‘real’ economy in the

Eurozone. It is still largely stagnant at best. Unemployment remains at double digit

levels. Business investment is poor. Bank lending flat. Nor is the Euro banking system

less fragile today than before, contrary to the general view. Meanwhile, something like

half of all government bonds in the Eurozone are now offering negative interest rates?

No one knows how that ‘known unknown’ will respond to a Greek default; or what the

consequence of still more widespread and even more negative government interest

rates might be on the real Euro economy in the wake of a Greek default or exit? Or how

about the effects of default or exit on the Euro currency, and in turn global currency

instability, if Greece defaulted or exited?

The global economy is not growing robustly. China is clearly slowing. Japan’s QE

experiment has failed, boosting stock values but not the real economy. Emerging

markets everywhere are struggling with commodities and oil price collapse, with

currency instability, capital outflow and the effects of eventual U.S. interest rate hikes.

Meanwhile, the U.S. economy this week will likely show another quarterly GDP

collapse to near 0-1% growth, the fourth GDP ‘collapse’ since 2009. This is not a global,

or Eurozone, economic environment where a major shock like a Greek default or exit

may have few contagion effects. In fact, quite the contrary.

Despite all this, arrogant German, Dutch, and other technocrats and bankers intent on

retaining the old order of austerity and debt payments in Greece continue blindly to

insist on more of the same, when it is clear that the Greek people and, hopefully its

government, will refuse to continue with ‘business as usual’. The techno-banksters may

just over-estimate their hard ball tactics and get swept up in the ‘Plan B’

themselves—even when they may not initially have planned for that. They pushed

Greece and Syriza to the brink last February 28. Syriza had enough sense to not bring

the crisis to a test at that time. They have bought time. They still have until the end of

June, when the February 28 agreement to extend runs out.

No doubt Schaubel and EC ministers, the ECB and the IMF, think they can push

Greece to the wall again, and another concession will be made. But perhaps not.

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Tsipras has been meeting with Russia. Perhaps also with China. Perhaps Greece has its

own ‘Plan B’. Time will tell. In the interim, the hardliners will become even more

hardline, more obstinate, more demanding. They think they have marginalized and

contained Greek finance minister, Varoufakis. However, they themselves may have

been marginalized. The real negotiations on the Greek debt and the future of austerity

has moved—from Schaubel and company to direct back door negotiations that have

opened last week between Angela Merkle and Alex Tsipras.

Much will depend on the state of the Eurozone economy in late June, as well as on how

well Greece can deal with the increasing economic pressure the Troika will continue to

impose in the interim. The European Commission will continue to withhold funds. The

ECB will continue to put pressure on the Greek banks. And the IMF will continue to

leak details of ‘Plan B’. Greece should plan to raise the stakes in the interim as well

perhaps. After all, there will be no concessions nor any agreement on anything until the

end of June.

Jack Rasmus is author of the forthcoming book, ‘Systemic Fragility in the Global

Economy’, published by Clarity Press, 2015; and the previous works, ‘Epic Recession:

Prelude to Global Depression’, Pluto Press 2010, and ‘Obama’s Economy: Recovery

for the Few’, Pluto Press, 2012. He blogs at jackrasmus.com.

This piece first appeared at TeleSUR.

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