Greek debt: Syriza cannot win a game of chicken

Whatever one’s view of Syriza’s political inclinations, we should wish them well. They can give Greece a new start. More than any other party they seem to be willing to lead the country through the necessary rehab out of debt reliance, tax evasion, nepotism and corruption. Nobody can take the delivery of election promises for granted. But Syriza deserves a chance to make the best of the challenge, not least to avoid losing face in front of their electorate.

However, success depends largely on what Greece’s partners can and will do. They cannot lose face either. To ensure their goodwill, Greek damnation of the Troika is not helpful. Nor are unrealistic demands on the European Central Bank and the general hostility towards the main creditor, Germany, which permeates Syriza’s programme and its leaders’ statements.

Ms. Merkel has been steadfast in supporting European bailout and debt relief mechanisms. She did so against strong opposition in her own country. How can she go an extra mile, with public opinion beginning to see Syriza’s demands as evidence that she was wrong all the time – and knew it? The argument that Germany has done well by the crisis (e.g. in terms of incoming capital flows) does not cut ice with voters. They will not be criticized for harvesting byproducts of their own economic and budgetary solidity.

Nevertheless, a new deal for Greece seems possible. The length of the reimbursement period of present debt (last payments in 2057) and the level of interest rate (some 2%), make the present arrangement look much like a write-off in terms of capital investment. An additional grace period and tailoring repayment to actual growth seem only relatively small additional steps. Discounting investment-related deficits is not an exclusive Greek demand (re Italy, France and Spain) and could become an accepted feature in EU economic and budgetary surveillance.

The Greek initial demand for a 50% debt reduction was clearly a bridge too far, especially after the previous “haircut” and softening of remaining reimbursement terms. It is obviously important for the credit-worthiness of a country to lower its debt/GDP ratio. 

But ultimately, what matters more is the country’s future capacity, through growth, to refinance its debt on capital markets. Public debts are either continuously rescheduled or repaid after very long periods, shrunk by inflation and growth. The UK reimbursed its US WW2 loan in 2006; Germany its remaining WW1 debt in 2010.

No wonder that Greece’s creditors insist on reform for future credibility. Once that is guaranteed, creditors can save face and show enough goodwill for a new deal. Given the alternative, that outcome will be in everybody’s interest. But what have the Greeks put on the table? The anti-austerity promises in the Syriza programme go against structural reform. Additional grace periods may allow financing some of these promises but for how long? Improving taxation and fighting corruption will take time. Clear announcements and visible implementation will create confidence. But the operation remains delicate and success uncertain. Market reactions, most relevant for Greece’s return to the bond market, remain unpredictable.

Syriza must offer a credible quid pro quo, even at the expense of some of its election promises. They would do well to build on the EU’s record of successful, if sometimes excruciatingly long, give-and-take negotiations. They cannot hope to make Ms Merkel blink first in a game of chicken. Domestically, she cannot afford to. But her support in exchange for a serious, future-oriented package that saves everybody’s face seems a safe bet.