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Brinksmanship in Greece: Debt Crisis 101

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[Author’s note: It’s recently come to my attention that this column has been translated into Greek and posted on various Greek news sites. While I appreciate my readers, I want to make it very clear that I do not speak, read, or write Greek, and that no Greek translations of this column have been personally authorized by me. The English-language column on the Stanford Daily website (that is, the one you’re reading right now) is the only version of the column that I have examined and approved, and while I am not aware of what the Greek editions of my column actually say, I cannot and do not take any responsibility for any translation inaccuracies or other changes in the meaning of the column that may have occurred. Happy reading. (Winston Shi, February 9, 2015)]

 

The clock is ticking on Greece.

There’s not much time left until Greece will be unable to pay its bills, and yet the two sides of the struggle – the European financial institutions that own Greece’s debt and the newly elected Syriza political party  that wants forgiveness for some of that debt – are content to play chicken with each other with over 310 billion euros on the line.

The next few months will be critical for the future of the Eurozone, and, as such, for the financial stability of Europe itself. The precedents that the Greek affair will set have major implications for the other fiscally unstable countries in Europe. Will Europe blink and concede the principle of debt forgiveness in the Eurozone? If Europe sticks to its guns, what can Greece do in response? And where does America fit into this giant puzzle?

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Syriza’s electoral promise is straightforward enough: Fifty cents on the dollar is better than nothing. Greece holds debt, Europe doesn’t want to lose that debt, and the European banks will give Greece a discount if it means they’ll get some of their money back. As the Greek finance minister put it, “We will have liquidity problems in March…then we’ll see how harsh Europe is.”

From Syriza’s standpoint, it’s a pretty canny plan. There is no official supranational police force that forces countries to repay their debts, unlike national law enforcement, which seizes assets to compensate bondholders. In short, Greece can default on its debt whenever it wants.

Moreover, politically, Syriza has little choice but to dare Europe to blink. In order to generate immediate budget surpluses to pay down Greece’s crippling debt, the previous government had slashed government programs and raised taxes to the point of making a very real dent in Greeks’ standard of living, comparable in scope to the Great Depression. Nominal GDP peaked at 242 billion euros in 2008; it’s below 200 billion today.

Running fiscal deficits and taking on debt was a Band-Aid that could not hold for long. Greece was probably never a 242-billion-euro economy in the first place. Nonetheless, the consequent upheaval and discontent is, not to put too fine a point on it, obvious — that is why Syriza is in power today.

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Previously, policymakers have focused on how Greece can be saved from financial collapse, but now a purposeful default is now on the table. However, in going on the offensive, Syriza’s brinksmanship risks fatally redefining the Greek debt crisis. If the Greeks are willing to default, then Europe must consider what a Greek default would mean for Europe. And the answer is: not much.

Ironically, it is Greece’s weakness that makes it comparatively easy to handle. Greece owes a lot of money, but it’s still only 2 percent of the Eurozone economy. If the threat of a Greek default can belabor Europe into submission, what about larger countries? Portugal and Italy are in better shape than Greece, but both bear total debt burdens far greater than Greece’s. What if they decide to test the waters of brinksmanship themselves? Ditto for Spain, where the unemployment rate is at positively Grecian levels.

These countries have the economic leverage that Greece lacks: They can hold Europe hostage. And while these countries are in less danger of collapse, despite Syriza’s bluster (their economies are stronger, and as a fraction of GDP, their debt loads are smaller than Greece’s), even fractional debt forgiveness on their loans could be devastating losses for Europe.

Will Europe’s stronger countries accept that precedent? In Germany, Eurozone skeptics are already on the march. Europe will not give Syriza what it wants because there is little reason for it to do so. If the Eurozone operated in a vacuum, then the the so-called Grexit would soon be in the works.

***

But the Eurozone does not operate in a vacuum, and this is where America comes in. Greece likely won’t default and leave the euro, and Syriza likely won’t come away emptyhanded. And that has nothing to do with economics. It has everything to do with geopolitics.

If Syriza defaults, it may not be able to borrow in free financial markets, but it will still be able to borrow in places where the free market does not apply. Countries like China and Russia may bail out Greece in exchange for political favors. And if Syriza is willing to play the auctioneer, losing money on the deal may still be worth it if it buys Greece’s friendship. It’s no coincidence that immediately after Syriza won the election, Vladimir Putin invited Alexis Tsipiras, the victorious Syriza prime minister, to Moscow.

There is a reason why Greece is in NATO, and there is a reason why Greece was the first country Harry Truman pointed to when he proposed the Marshall Plan. Greece, along with Turkey, occupies an excellent strategic position in Europe. Along with Turkey, it is positioned to control Russian access to the Mediterranean. And during the Cold War, it was one of America’s most important missile bases. Aside from that, the thought of a NATO member being beholden to a country outside of NATO is patently unacceptable.

America will probably pressure Europe to accept a longer timeframe on Greek debt – in short, a refinancing. Both sides in the conflict will get to say that they got what they wanted – Greece will be able to lessen its austerity, and Europe will avoid writedowns on its debt. America may well have to give some concessions to Europe to make that happen. But I suppose that’s the price for being the leader of the free world.

Contact Winston Shi at wshi94 ‘at’ stanford.edu.

Winston Shi was the Managing Editor of Opinions for Volume 245 (February-June 2014). He also served as an opinions and sports columnist, a senior staff writer, and a member of the Editorial Board. A native of Thousand Oaks, California (the one place on the planet with better weather than Stanford), he graduated from Stanford in June 2016 with bachelor's and master's degrees in history. He is currently attending law school, where he preaches the greatness of Stanford football to anybody who will listen, and other people who won't.