Timing is everything, Syriza has chosen the right moment


Syriza has won the elections in Greece. Their plan is to negotiate a write-down of Greece’s government debt.
As with all debt restructurings an agreement will only be possible if the lender has come to the conclusion that it is to his benefit to accept a write-down. Is that the case?
First of all one must understand that the holders of Greece’s debt these days are the citizens of Europe (see above chart). The European Union decided to bail out the French and German banks that had originally lent to Greece.
This is the core issue that makes this seemingly economic affair a fundamentally political one. The European Union should have forced the banks to take their losses and negotiate with Greece a level of debt compatible with the economic reforms the country needed. Instead the priority was to preserve the stability of the European banking industry, one may even say its survival. Greece and Europe as a whole were left with an utterly unresolved problem. Everybody knew Greece couldn’t repay in full, nobody dared saying it. Until Syriza chose the right issue at the right time.
But what is the real issue? What’s wrong with looking at a problem straight into the eyes? In my opinion, absolutely nothing. Or rather, the problem is that the issue has been grabbed by a party that is unpredictable to say the least. The traditional parties lacked the courage to articulate the problems of Greece in a more assertive way. Of course Syriza benefits from the fact that it has never had to deal with the realities of holding office.
What is going to happen next is a major exercise in negotiation. Germany as the lead negotiator on behalf of the creditors will continue demanding reforms and strict covenants from Greece. At some point in 2015 a write-down will be agreed and in my opinion Greece could benefit from three factors: lower debt service, more active fiscal policies and QE (as Greek debt will be eligible for the EB’s bond-buying scheme).

Then there is the political issue. Syriza’s victory in Greece is not self contained. The obvious effect would be a boost for Podemos in Spain. But there are major differences between the two countries. A write-down of Spanish sovereign debt would seriously hurt Spanish banks which hold a significant proportion of the total stock of debt. The Spanish banking industry has already undergone a round of consolidation. Forcing the main Spanish banks to take large losses would weaken them to the point of losing their position as major multinationals.
And putting Spanish debt at risk would mean excluding it from the QE scheme. That means effectively no monetary policy for Spain, which would have to resort to fiscal measures, exactly the ones Podemos is advocating. But Spain’s debt/GDP ratio is already above 100% (and growing).

I believe that Podemos is using debt restructuring as a populist, electoral issue. A tool to gain influence and votes. But it is not the central issue. For Podemos seizing power is the real issue.


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