Back in February, Greece, the International Monetary Fund, the European Central Bank, and various eurozone stakeholders all managed to hammer out a temporary deal to keep Greece's struggling country afloat. How much cutting of government and services could Greece tolerate? How forgiving were its creditors willing to appear? And would that be enough for the math to meet in the middle?
Fast forward four months, and it looks like the answer may well be no. In fact, it's not clear anyone was able to gain any inches at all.
On Monday, the European players held a meeting in Berlin — from which Greece was notably excluded — to put together a "take it or leave it" offer. The proposal went to Greece on Wednesday. And while it reportedly has more forgiving standards than Greece's creditors have previously demanded, it's not clear they can squeeze even that much more blood from the stone. The country's unemployment is still at a borderline-apocalyptic 26 percent, and wages and benefits have cratered.
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So it's not surprising that Greek Prime Minister Alexis Tsipras also unilaterally put together a new proposal on Tuesday.
Everyone will be meeting this week to see if they can stop talking past one another. Time is short: Greece owes 300 million euros to the IMF on Friday, plus another 1.2 billion euros later this month. The European creditors are withholding just over 7 billion euros from the current bailout deal until Greece shows them progress, so a meeting of the minds is needed for Greece to survive just through June. Then the current bailout package expires, and a whole other round of debt repayments will start hitting in the next few months after that.
To get a sense of just how insane this whole debacle is, it's worth remembering a simple truth: Debt is just a wager. When you loan a businesses money, you're betting it will do well over the long term, and will thus be able to pay you back both the principle and the interest. When you loan money to a government, you're betting the country's underlying economy will do well, so the government can pay you back in the same manner.
We tend to think of investment in stocks and that sort of thing as a bet, and debt as something else. But the only real difference between the two are the nuances of the contractual legal structure. In both cases, you give someone money based on your belief their future is bright, and that bright future will allow them to give you money back.
Which brings us to the insane part: Europe's only willing to bet on Greece if it can impose conditions that essentially guarantee the bet will be a losing one. And Greece is so desperate for any lifeline that so far it's been willing to take that wager.
A government is an intrinsic part of any country's economic ecology. Force it to massively cut spending or hike taxes — and prevent it from devaluing its currency to rebalance the flows of capital — and you're literally sucking demand out of the economy. That's all primary surplus really is: dead weight on jobs and growth. As the economy tanks, the size of the debt becomes bigger by comparison, perversely increasing the threat it poses. And with the economy generating less wealth and income to tax, the government will have an even more difficult time paying anything back.
In fact, researchers within the IMF just released a study that suggests the best way for governments to handle big debt loads is to simply wait them out. You don't even have to balance a budget to do this: Keep annual deficits small enough, and the size of the debt will grow slower than the economy does, meaning the debt-to-economy ratio — which is all that really matters here — shrinks over time. The paper says what sane observers have been saying for a while, namely that most major Western countries, including the United States, still have enormous room to borrow with essentially zero consequence.
Now, that leeway isn't limitless, and the report lists Greece as one of the few countries that has run out of room. But if you follow the trail of links, the basis for that assessment is the likelihood Greece will default; i.e. what's being measured is the risk to creditors of lending Greece anymore money. But the main subject of the paper that establishes that metric is a long list of reasons why allowing Greece to default would be a terrible idea, with a whole host of massive risks for the European economy.
Greece will default if it doesn't get more money, but its creditors are assuring it could well default even if it does — which means they shouldn't lend Greece anymore, but they can't possibly allow a default. The mind reels.
In a sane world, Greece would do what most other countries have done when faced with both big debt loads and the pressing need to repair their economy: Roll the debt over with new borrowing, and then just pony up the interest and service payments in perpetuity while slowly growing their way out of the problem. America is still paying off debt from World War I for crying out loud.
But allowing Greece to refinance its debt is fundamentally a decision about political optics and perceived moral seemliness, not economic necessity. Spain and Portugal are warily eyeing their own populist upheavals, and fear any leniency to Greece's ruling Syriza Party will simply encourage the other movements. Other countries have less generous retirement systems and the like than Greece, and object to bailing the country out unless it cuts to their level.
But the main problem is just mutual incomprehension between the major players. Syriza feels it's already made massive concessions, and is already under pressure from its supporters for giving away too much. While Germany and the other European leaders view the arguably inexperienced and hotheaded Syriza representatives — not to mention Greece as a whole — as demanding, uncooperative, and insufficiently disciplined. Meanwhile, the Greek populace is not crazy about ending the eurozone experiment, but their enthusiasm for staying in the union is dropping.
Defaulting on the debt and reestablishing a national currency would bring enormous short-term pain. But it would also allow the aforementioned devaluation that could get Greece back on a long-term path to growth and repair.
It's less and less apparent why the current impasse is any better than that route.
