Greece will survive another D-Day – no thanks to Russia

Greece will avoid D-Day. That’s D for “Default”. This week, Greek finance minister Yanis Varoufakis met with IMF chief Christine Lagarde, assuring her that Athens would meet its €450 million obligation to the Fund, due on April 9.

Had Greece failed to meet that deadline, it would have been formally in default. But markets scarcely seemed to notice. This week, Greece had no trouble selling over €1.1 billion in short-term Treasury bills in an auction on April 8. The coupon rate remained under 3%, virtually unchanged from a year ago.

However, it costs Athens significantly more than its Mediterranean partners in Spain and Portugal to roll over old debt into new. Moreover, Greece has now hit the €15 billion ceiling on private-sector borrowing that its Troika conditions allow.

But it doesn’t end there. Greece has a raft of payments due to the IMF, with the largest tranche, €745 million, scheduled for 12 May. The May 1-12 period alone requires the Greek government to repay €950 million to the IMF.

In total, Athens owes the Fund €9.7 billion this year. Under the conditionalities imposed by the Troika (the EU Commission, European Central Bank and IMF), a single loan left in arrears would technically consign Greece to the status of defaulter. No country has ever defaulted on an IMF loan since the Fund was formed following the 1944 Bretton Woods conference.

April’s repayments are covered. But the cash register may be empty in May. This is where Varoufakis’ commitment to repay the Troika loans internally contradict his party’s expenditure commitments to ensure payments to pensioners and public servants. Syriza also went to the election promising not to cut wages or pensions further. No Greek leader has determined how to untie this particular Gordian knot. Former prime minister Samaris chose major expenditure cuts. Conversely, Prime Minister Tsipras and finance minister Varoufakis seek to dismantle New Democracy’s austerity regime; however, in law, Greece is bound by commitments of the former Papandreou government, which gave in to Berlin’s demands for fiscal discipline.

The IMF has estimated Greece would raise $2.2 billion from privatisations in 2015. Conversely, the Greek government argued that if the ECB distributed its 2014 Securities Market Program (SMP) profits, a bond-buying program operated by the central bank, Greece’s $1.9 billion share of SMP revenues would cover most of the shortfall, if the asset sales did not proceed.

In a leaked transcript of the Eurogroup meeting of February 11, Varoufakis argued strongly against fire-sale public asset liquidations in order to finance Athens’ debt obligations, due to deflated prices.

In late March, the ECB, controversially, forbade Greek banks from assuming more public-sector debt via the purchases of Greek government T-bills (thus preventing Greece’s banking sector from creating new money out of government junk bonds). However, the ECB also raised the limit on the Emergency Liquidity Assistance (ELA) program by €700 million, to ensure continued liquidity within the Greek financial sector. ELA provides the Greek central bank with an essential lending facility to the commercial and retail banking sectors.

Meanwhile, Tsipras wants to implement Syriza’s policy agenda urgently. His Syriza coalition has moved quickly on three fronts to distance itself from the former New Democracy government’s austerity program. First, on the expenditure side, the government is committed to its pre-election program of restoring a number of pension benefits.

Second, in the finance sector, it has removed the chairpersons of the two biggest Greek banks and appointed its political allies.

Third, on the revenue side, Varoufakis’ finance ministry has made sensible reform suggestions in relation to tax audits to combat evasion, outbound capital transfers and VAT collection, all of which have contributed to serious revenue shortfalls.

However, since Syriza’s election early this year, German-Greek relations have soured noticeably, as Berlin remains implacably opposed to a renegotiation of the terms of the Greek bailout. This, in turn, has led Athens to seek suitors elsewhere.

From Russia, with love

During the Balkan wars, the disintegrating Yugoslav federation faced international opprobrium and a UN arms embargo. But throughout the 1990s, Athens turned a blind eye to smuggled Russian weapons, as the Greek government, with a telescope to the blind eye, acted as a conduit for arms transfers to President Milosevic’s genocidal regime. The EU’s recognition of the former Yugoslav Republic of Macedonia (FYROM) in 1995 also enraged the Greek government, which blocked FYROM’s plans for EU membership.

More recently, EU insiders have complained that every European defence document winds up in the hands of the Kremlin, courtesy of Athens. Indeed, Greece’s “tilt east” has furrowed enough brows in Washington to bring the big guns in to set Tsipras straight. In March, Obama sent Assistant Secretary for European and Eurasian Affairs, Victoria Nuland, to meet with Greek officials. Yes, the same Victoria Nuland who was recorded saying “Eff the EU!” in 2014.

Doing deals with Russia always comes with strings attached. In 2013, the government of Cyprus creamed off Russian oligarchs’ deposits to deal with its own sovereign debt crisis. But Moscow had the last laugh, as the collapsing Bank of Cyprus sought drastic measures to avoid disaster. 60% of shareholders of the Bank of Cyprus are now Russians. It was, as the New York Times put it, delivering a systemic EU bank into the hands of the Russian oligarchs. To add a cherry on top, Moscow secured naval access to Cypriot ports as a reward for its efforts.

Greece has looked even further east for investors as EU private sector participation in Greece has fallen flat. In 2009, China’s Cosco took a 33% stake in Piraeus, Greece’s largest port. More recently, Cosco bid for a controlling 58% of the port in the latest wave of privatisations, but Syriza may temporarily halt Beijing’s Mediterranean thrust.

Tsipras’ Moscow visit drew a terse response from Angela Merkel, but no deal has been announced, beyond support for a Turkish Stream gas pipeline from Russia. The EU’s biggest fear is that Athens will dilute or even repudiate the sanctions Moscow has faced since its annexation of Crimea in 2014. Putin’s government, for its part, has canvassed food exports to Greece, coupled with cheaper wholesale gas prices. Ironically, Germany pays much less for gas from Russia than Greece, under Berlin’s long-term Nord Stream pipeline deal.

But Putin doesn’t run a charity. Russia will want chunks of Greek infrastructure in exchange for cheap gas and investment, although cash-strapped Moscow doesn’t have the capital to bail out Athens, even if it wanted to.

Don’t mention the war

And now we shift from the Crimean War for the Second World War. This week, Greece’s deputy finance minister, Dimitris Mardas, placed a figure – $US382 billion – on the World War II reparations Athens claims it is owed by Berlin.

This shouldn’t prove more than a minor irritant to Angela Merkel’s government. The issue of German reparations was settled by the 1953 London Agreement, to which Greece was a signatory.

Frankly, Greece’s general accounting office should have better ways of spending its time than devoting resources to this fool’s errand. The World War II forced loan the Nazi government obtained from the Bank of Greece may be up for debate (worth around €10 billion now), but the question of German reparations was settled in international law with Bonn’s DM115 million payment to Athens in 1960.

What is to be done?

As I’ve argued elsewhere, the humanitarian crisis in Greece could be tackled better by the eurozone engaging in a serious study of debt forgiveness. Third World economies have persistently been granted debt amortisation in response to an inability to repay a major part of their loans. So should Greece – but with conditions.

Significant debt restructuring took place during the 2012 Greek crisis; yet, it left Athens with debts on the current loans until 2054. On current projections, the next generation of Greek 20-somethings are in for a lean time during the late 2030s, when debt repayments peak.

The Troika’s requirement that Greece maintains a primary fiscal surplus of 4.5% of GDP, coupled with structural reform, leaves precious little room for social spending, let alone domestic infrastructure investment, which will be left to foreign investors.

Most economists agree that a reduction of the primary surplus, combined with some flexibility from the ECB (for example, participation in the quantitative easing program the bank commenced in March) would be preferable to rigidly-high unemployment and growth-limiting austerity.

The IMF typically ties its loans to the implementation of a structural adjustment program. Iterative debt forgiveness or restructuring, coupled with genuine structural reform implementation, would provide the incentive to current and future Greek governments to maintain the pace of reform in return for increased national investment in human and physical capital.

To be blunt, when Greece acceded to the EU in 1981, it was a Second World economy. It has remained that way, with only the debt-fuelled binge provided by the appreciating euro from 2002 presenting a thin veneer of affluence. 2009 proved how implausible this really was.

In 1953, the bulk of Germany’s debts were forgiven, which paved the way for post-war prosperity. Washington understood what could emerge from the insurmountable debt obligations imposed upon Weimar at the 1919 Versailles Conference and injected massive amounts of capital into Western Europe, while seeking debt amortisation for Germany.

In 1919, John Maynard Keynes stalked out of Versailles in a rage and wrote The Economic Consequences of the Peace, prophesying the Great Depression with remarkable prescience.

The trouble with Europe’s leaders today is that not one possesses either Keynes’ courage or his foresight.

Remy Davison's Chair is funded by the EU Commission.