21st Mar 2018


The eurozone's debt moment

  • Between 2008 and 2015 Greek GDP per capita, adjusted to inflation, dived 30 percent to €18,000 (Photo: u07ch)

Greece will hold snap general elections on 25 January bringing to a head a long brewing conflict between Brussels economic austerity policies and Greece's political protests.

Between 2008 and 2015 Greek GDP per capita, adjusted to inflation, tanked 30 percent to €18,000.

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In absolute terms, that is comparable to a collapse of living standards from the level of Israel to those of Libya or Gabon.

In the process, Greece’s ranking in the global competitiveness index has plunged from 67 to 81, below Ukraine and Algeria.

The subsequent social devastation has translated to a new normal in politics.

In half a decade, an entire generation of centrist politicians has been discredited in Greece. When the eurozone crisis took off in spring 2010, Greece was still governed by the Panhellenic Socialist Movement (Pasok) led by George Papandreou, which dominated almost 40 percent of the vote, while the conservative New Democracy (ND) had about a third.

Today Pasok has lost most of its support, while the conservatives are struggling to stay in government.

Meanwhile, the support of former fringe parties has exploded.

The radical left Syriza looks set to win the January election - it has about 28 percent of the vote, as against 25 percent for the conservative ND.

So what will Syriza do if it wins?

From social policies to debt relief

We now know that by 2012 German chancellor Angela Merkel was close to permitting a Greek default - but fear that a Greek contagion could spead to Italy and Spain drew Berlin back from the brink.

So Greece was given its second bailout. Now behind-the-scenes talks have begun over a third bailout amounting to €30 billion.

Syriza, for its part, wants to launch a social-policy package that the Troika – the European Commission (EC), European Central Bank (ECB) and the International Monetary Fund (IMF) – considers highly controversial.

The package includes a (big) haircut for creditors; tax cuts for all but the rich; an increase in the minimum wage and pensions to €750 a month; free electricity, food stamps, shelter and healthcare for those who need it; a moratorium on private debt payments to banks above 20 percent of disposable incomes.

But nothing makes the Troika so uneasy as Syriza’s pledge to have an international conference on debt relief.

Tsipras has already addressed the issue in meetings with the EU commission, German finance minister Wolfgang Schauble and IMF officials, while sending his economic advisors to the City of London to reassure investors that debt profiling would only implicate Official Sector Involvement (OSI).

In 2015, after some €250 billion in bailouts, Greece’s financial needs are estimated at almost €20 billion, which features interest payments, IMF funds repayments, ECB’s maturing bonds, and arrears – none of which can be easily delayed.

Led by Samaras’s New Democracy, Greece might cover some of these needs with the hoped-for primary surplus, planned privatisations and creative financial manouvering; but not without a funding gap of €5 billion - €10 billion.

With Syriza in charge, the planned privatisations would be challenged, while the primary surplus would become questionable as Athens would push debt re-profiling.

In both cases, the Greek election outcome will have an impact on the anticipated ECB bond purchases, which also depend on whether Germany will give the go-ahead to the ECB’s full quantitative easing (QE).

In the past few years, Brussels has managed to build insulation mechanisms to reduce (though not to mitigate) the probability of contagion.

But these mechanisms rely on the market expectation that the ECB is about to engage in broader QE, which is expected to include buying the bonds of larger Southern European economies (Spain and Italy), but could exclude smaller peripheral countries (Greece, along with Portugal and Cyprus).


The post-election drama will begin if Syriza wins and starts talks with the Troika.

Tsipras has set the tone by saying that his government would cease to enforce the bail-out demands “from its first day in office”.

He is hoping that the Troika and Germany will blink and support Greece, despite Athens’ new policies.

If they do blink, Syria is expected to allow the dilution of its social policies, but not its pledge of an international debt conference.

It would seek debt relief reminiscent of that granted to Germany in 1952 (62 percent). That would substantially cut the general government debt, which today exceeds 190 percent of the Greek GDP.

But what if neither the Troika nor Syriza back down?

In this case markets would be swept by new volatility and Athens might be forced to exit the eurozone.

Whatever the final scenario, the repercussions will be felt not just in Greece or the eurozone, but worldwide.

Dan Steinbock is an analyst at the US-based India, China and America Institute and a visiting fellow at the Shanghai Institute for International Studies and the EU Center in Singapore

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