Monday

20th Nov 2017

Analysis

Europe's debt revolution: Can Syriza's plan work?

  • London in 1953: Syriza's plan to restructure almost half the eurozone's government debt deserves to be taken seriously (Photo: Dave Wood)

Syriza’s promises to call an end to the Brussels-mandated budgetary austerity policies which both socialist and centre-right governments have been following since 2010 are not new - politicians of the left and right have been promising to ease austerity across much of Europe over the past couple of years.

But what is potentially groundbreaking is Syriza’s proposal to convene a European Debt Conference, modelled on the London Agreement on German External Debts in 1953 which wrote off around 60 percent of West Germany’s debts following the Second World War, and which Syriza hopes would lead to a huge write-down of government debt for Greece and other southern European countries.

Dismissed as fantasy

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The idea was initially mooted by Syriza leader Alexis Tsipras in 2012 when the left-wing coalition finished second in the last Greek elections.

Roundly dismissed as fantasy for almost all the two years since then, the proposal is at the heart of the party’s campaign manifesto and Syriza insists it won’t back down if it wins the election.

Tsipras argues that austerity may be gradually balancing budgets in Greece and elsewhere but is doing nothing to reduce the bloc’s already crippling (and increasing) debt burdens.

“Austerity is both irrational and destructive,” he told supporters earlier this month. “To pay back debt, a bold restructuring is needed.”

Leaving aside the emotive war references, Syriza is so close to taking power that the proposal deserves to be taken seriously.

The question is what it could mean, for Greece and for the eurozone’s other highly indebted countries, not to mention the rest of the bloc and the reaction of financial markets.

The Milios paper

The most accurate answers are based on a paper published last year, co-authored by Syriza’s chief economist John Milios, a former academic at Athens’ National Technical university.

The Milios paper contemplated an across-the-board write-down of all eurozone debt over 50 percent of GDP - around €4.35 trillion.

Like most economic observers of the eurozone, Milios sees the European Central Banks (ECB) as the focal point in the rescue plan. Under his plan, the Frankfurt-based bank would buy up the excess debt and convert it to zero-coupon bonds which would ultimately be paid back by governments.

No transfers would take place between governments or taxpayers. In order to fund the debt purchases, the ECB would borrow money from the private sector.

Over €1.2 trillion of Italy’s debts would be restructured under the plan (the highest amount of any eurozone country), followed by €895 billion and €778 billion of French and German government debt, respectively.

Only four countries - Luxembourg, Estonia, Latvia and Lithuania - would not be part of the programme. At the other end of the scale, Greece and Italy would be the last to finally buy back their debt - in 58 and 60 years’ time, respectively.

ECB intervention

One of Milios’ strongest arguments is that the crisis has already forced the ECB to dramatically increase its intervention in the markets.

In 2007 the ECB’s balance sheet totalled €1.2 trillion, expanding to nearly €4 trillion at the height of the crisis in 2010 - a level which ECB president Mario Draghi has indicated the bank is aiming to return to through its ongoing plans to buy up private sector (and potentially government) bonds over the course of 2015.

The only difference with his plan, Milios says, is that the bank has limited its intervention to private sector rather than government debt.

The ECB would, under the Milos proposal, incur substantial losses - initially losing between €50 and 60 billion in the first five years of the programme, and around €1 trillion cushioned over 40 years. But in return, the eurozone would get a largely debt-free future.

For Greece specifically, Milios argues that debt restructuring should follow the principles of the London Agreement: a five-year grace period before the repayment of its debt burden begins, with a “growth clause” to be established so that the repayment of the remaining debt is financed by growth rather than solely by budget cuts.

Milios himself admits that “this cannot be a viable plan for the euro area as a whole”.

How realistic?

How radical a blueprint is this?

ING chief economist Carsten Brzeski tells this website that “halving government debt would probably make sense.”

“Another benchmark could be to lower it at least to 100 percent of GDP. It all depends on whether such debt restructuring would be exclusively for the Greek or also for other highly-indebted countries,” he adds.

“A huge cut would make most sense but would probably lead to restructuring in several other countries. A small cut would limit restructuring to Greece, but would make little sense and bear the risk that new restructuring would have to follow at a later point in time.”

The reaction of the financial markets to such a plan is, as usual, hard to guess.

Fears about a Syriza election victory have contributed to the euro falling to its lowest level against the dollar in nine years.

The prospect of reopening the Pandora’s Box of debt restructuring is unlikely to be welcomed by markets.

But Brzeski tells EUobserver that “if it [a restructuring] could be ring-fenced, small and limited to Greece, market reaction could also be rather limited”.

He concedes that “this [scenario] is highly hypothetical and therefore a very tough one to guess as to how they would orchestrate it. It would be unprecedented”.

After five years of bailouts, haircuts and restructuring, Europe’s politicians and people are understandably not enthusiastic about re-opening the debt debate.

But in that time the eurozone’s debt burden has steadily grown, and will average nearly 100 percent of GDP by the end of 2015.

Syriza’s “debt conference” plan is not nearly as outlandish as it sounds at first glance.

EU hints at more time, but no Greek write-offs

EU finance chiefs have hinted Greece might get more time to repay debts but refused to budge on the new Greek government’s demands to write-off part of its burden.

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