There are many things one might accuse the new Greek government of: scaring investors, breaching diplomatic protocol or rather odd sartorial choices. In fact, new finance minister Yanis Varoufakis has ticked all those boxes in his first week in office.
Barely sworn in, Prime Minister Alexis Tsipras’ new cabinet went straight to work trying to turn their country upside down — and the European Union with it. By fighting austerity and pushing for debt relief, they are attempting to lead Greece out of its five-year long depression and solve its economic woes.
Unfortunately, the Tsipras government is fighting the wrong crisis, in more than one sense. Greece’s short-term problem is not the debt it owes to other European countries and institutions. And Greece’s long-term challenge is not the total level of debt but its lack of competitiveness.
As Tsipras and Varoufakis are meeting their European counterparts to lobby for debt relief, they are focusing on a part of Greece’s debt that should probably worry them least for the moment. The maturities on these loans are so long and the interest rates so low, that Greece should be able to afford them easily.
The largest source of lending to Greece is the European Financial Stability Facility, the first bailout fund set up by the European Union. The €141.8 billion it has provided to Greece accounts for about 45 per cent of Greece’s total debt.
Repayment of the EFSF funds is scheduled to take place over the next 38 years (i.e. the final payment will only happen in 2053). On the EFSF’s website we also learn that the current weighted average maturity for loans to Greece is 32.38 years — way longer than the EFSF’s loans to Portugal and Ireland at 20.8 years.
What is even better for Athens: the interest rate on the EFSF loans is only about 1.5 per cent and repayments are only set to begin in 2023. In other words, even if Greece managed to negotiate a substantial haircut on its debt to the EFSF, it would not make a difference in its budget for the next eight years.
As a result of the generous conditions already given to the country, Greece’s current interest expenditure on its public debt (as a percentage of GDP) is comparable to that of France and Germany — and only about half of Italy’s burden.
Greece’s debt level of 177 per cent of GDP may sound unsustainable and, under normal circumstances, it almost certainly would be. But it is still manageable, thanks to the combination of low interest rates and long maturities.
If Tsipras and Varoufakis thus fight for debt relief, then this would certainly benefit future Greek governments. But there would hardly be any immediate impact.
There is a much smaller part of Greece’s total debt burden should cause much greater concern. While Greece’s total debt load has a long average maturity, a small proportion of its debt consists of treasury bills. These T-Bills have maturities of 13 and 26 weeks and a total volume of €15 billion, as approved by the European Central Bank.
As long as the Greek government is able to roll these T-Bills over and replace them with newly issued T-Bills each time, it would not have much to worry about. Yet rolling them over gets harder as uncertainty over Greece’s fiscal future grows and as Greek banks are struggling to refinance in the face of dwindling deposits.
How can Greek banks purchase T-Bills when their own customers withdraw their own deposits out of fear? Rolling over €15bn will get more difficult by the month, let alone increasing the volume T-bills as may be necessary once Greece does not receive any further bailout funds.
Tsipras therefore addresses Greece’s long-term debt problem when he should rather find ways of dealing with the short-maturity component of his country’s debt.
The other question is whether debt is really Greece’s most important issue. For what would Greece gain if it managed to drastically reduce its debt while not improving its other economic circumstances?
Few other figures illustrate Greece’s problems better than its exports ratio. Greek goods exports are 16.5 per cent of GDP. Within the eurozone, only Cyprus has a lower ratio at 13.5 percent. Other countries have a much stronger exports sector. Not just the fabled exports steamroller of Germany (38.3 percent) but even countries such Portugal (29 per cent) and Malta (37 per cent). The low Greek exports ratio demonstrates how uncompetitive Greece has become in international product markets.
If Greece wants to have an economy to create jobs and growth, it needs to continue the kind of supply-side reforms that were begun under the previous Papademos and Samaras administrations. What Tsipras’ government is about to do is the very opposite of such reforms. On the contrary, their first announcements are all about reversing previous reforms, strengthening trade unions, stopping privatisations and re-regulating the labour market. Such manoeuvres may keep Syriza’s voters happy, but they will not increase Greece’s growth potential.
In this context, it is worth dispelling the myth that Syriza was about ending austerity. According to calculations by Holger Schmieding, Berenberg Bank’s chief economist, Greek austerity had already come to an end in 2014.
Between 2010 and 2013, public spending provided negative fiscal impulses to the economy as a result of austerity. In 2014, on the other hand, Schmieding writes that “Greece relaxed its fiscal stance slightly … by 0.8 per cent of its GDP”. Put differently, austerity was already over before Syriza took office.
Tsipras and Varoufakis are thus fighting the wrong fights and dealing with the wrong crises. They are railing against austerity at a time when it has already ended. They are concerned about long-term debt when Greece’s financing problems lie in the short term. They are obsessed with debt when Greece’s real problems remain structural. And they are introducing measures that have the potential to reduce the country’s competitiveness, when it is further supply-side reforms that Greece really needs.
In doing all of the above, they are also provoking a further escalation of the euro crisis with their shrill version of diplomacy. But at least this could bring the euro crisis, which has been with us for more than five years now, to a head. The coming weeks will be decisive for the future for Europe’s monetary union.