In theory, it could still work. It only requires three miracles. Maybe the resounding “no” to the euro zone’s terms for a third bail-out in Sunday’s referendum in Greece (61 percent against) will force the euro currency’s real managers, Germany and France, to reconsider.
Maybe the International Monetary Fund (IMF) will publicly urge the euro zone’s leaders to cancel more of Greece’s crushing load of debt. Last Thursday the IMF released a report saying that Greece needed an extra 50 billion euros ($55 billion) over three years to roll over existing debt — but that even then, its debt was “unsustainable” in the long term.
And maybe Greek Prime Minister Alexis Tsipras will accept the terms he asked Greek voters to reject in the referendum if he can also get a big chunk of debt relief — say around 100 billion euros ($110 billion), about a third of Greece’s total debt — from the euro zone authorities and the IMF. It’s all theoretically possible, but it would require radically different behavior from all the parties involved.
Tsipras has already made one big gesture. On the morning after the referendum victory, he ditched his flamboyant finance minister, Yanis Varoufakis, who had needlessly alienated every other euro zone finance minister with his scattergun abuse. (He called them all “terrorists” during the referendum campaign.)
The International Monetary Fund’s gesture was even bigger, if much belated. It knew the euro zone’s strategy was wrong from the time of the first bailout in 2010, and it is finally admitting it.
There was no debt relief at all in the 2010 bailout, and only private-sector creditors were forced to take a “haircut” (around 30 percent) in the second bailout in 2012. Most of Greece’s debt was owed to German and French banks, and that wasn’t touched. Instead, 90 percent of the country’s bailout loans have gone straight into repaying European banks.
Why didn’t the International Monetary Fund blow the whistle on this long ago? Because it was not taking the lead in these negotiations, and by taking part in the 2010 bailout anyway it broke its own rules. It also knew that devaluation, usually a key part of IMF bailouts, is impossible for Greece unless it actually leaves the euro (which Greeks desperately don’t want to do).
So the usual post-bailout economic recovery didn’t happen. In five years Greece’s debt grew by half, its economy shrank by a quarter, and unemployment rose to 25 percent. Most Greeks know that the current approach simply isn’t working, which is why they voted “no” in the referendum.
The euro zone authorities also know that Greece’s debt can never be repaid in full, so why don’t they just give the Greeks the debt relief they need? Partly because Chancellor Angela Merkel knows that her own German voters would be furious at more “charity” funded by their taxes, whereas they stay fairly quiet so long as the debt is still on the books. And partly because other euro zone countries would see it as special treatment for Greece.
Italy, Spain, Portugal and Ireland have also been through harrowing bailout programs, and they don’t see why they should pay for Greece’s folly in running up such huge debts.
So it really isn’t possible to predict whether Tsipras and Greece will be offered a better deal or not. It’s equally impossible to say what will happen to the euro “single currency” if there is no deal and Greece crashes out of the euro in the next couple of weeks, although the euro zone authorities insist that they could weather the storm.
We live in interesting times.
