Greece and Europe managed to find a way to kick the can down the road a bit, giving them four months to come up with a larger agreement. It’s exactly the kind of solution that we cynically expected here in many ways. But is there more to it than that?
The letter sent by Greek Finance Minister Varoufakis to the EU outlines exactly where Greece is coming from, and it tells us a lot more about the problem at hand. What he asked for was nothing more than the kind of consideration any other nation would want in this situation. That it was received so badly at first, then ultimately accepted in at least some form, speaks volumes about either the dysfunction of the EU or how bankrupt Greece is.
I believe it is the former, and the EU is nowhere near developing a stable process for dealing with issues like Greece or even calling themselves a real political or financial arrangement for the long haul.
The immediate problem is that Greece has a big lump-sum payment due in June for the financing agreement previously forced on them. The €6.7B that comes due is something they simply cannot handle at this time, and they are sounding the alarm bells before there is a problem. That’s where the four month window comes from. They are being responsible.
The longer term problem is the debt, which at face value is 175% of GDP. But the terms of this debt has been restructured so heavily that it cannot be considered at face value any longer. One investor who bought up a lot of it at fire sale prices, Paul Kazarian, believes that it has already been written down by about 90%. If you take that into consideration, Greece is by no means bankrupt – it simply has a short-term cash flow problem.
The solution to the Greek debt is, obviously, to cancel much of it and push the reset button so that the nation can move forward. Why doesn’t that happen? The long answer is that it’s impossible in the current arrangement. The short answer is that it already happened.
More to the point, the Greek government is holding a lot of equity in banks and other businesses that they are supposed to privatize, or sell off to the public. That was supposed to cover the lump-sum payment that comes due this year. The new government believes that if they hold onto it until there is a recovery it will be worth much more and they will be in a much better position.
The US did as much when it bought GM and stock in several banks at the height of our own crisis. Iceland also nationalized its banks and held onto them until they were secure. Greece is asking for permission from the EU to do nothing more nor less than what any other sovereign nation does in a financial crisis of this kind. It has only gotten to the point that it has because no one has any faith in the Greek government – either the old one that created the mess or the new one that has to deal with it.
There is an obvious third way to handle the situation. No one really wants Greece to exit the Euro because it would create panic and confusion for everyone across the Eurozone. It’s a marriage of nations who are now bound to each other. If they all behaved that way, the nations who are pressuring Greece would give them support, not demands, and help them achieve the expertise necessary to manage the situation on their own.
Instead, Greece has a series of dictats telling them what to do. In this family, they are not adult partners but children.
What should Europe do with Greece? What is being done now is setting a precedent for economic problems and national mis-management for the future. It’s a horrible way to handle the situation and does absolutely nothing to convince Greece – or any nation – that the EU is indeed an equitable arrangement worth staying in.
If you believe that Greece is bankrupt, the solution is to bring in people from the outside to run the operation while the nation keeps on. Think of it like the FDIC, which swoops in to stop a bank failure here in the US. The problem is that sovereign nations don’t work that way and you can’t simply take them over. Greece needs help, yes, but it has to do this on its own terms.
Europe is muddling through this latest situation because it has to. It kicked the can down the road to 2015 and now it has to deal with those decisions. Greece, apparently, knows better and wants to develop its own plan.
They need to do that, and that plan needs to then be evaluated on its own terms. Four months may be enough time to do that. This agreement? It may be the best thing to happen to Greece and Europe yet – if the powerful nations manage to finally treat Greece like a real partner and not a problem.