Like two cowboys in an American western, Greece and the Troika have their pistols out for a debt showdown and the world watches to see who’ll be the quicker draw. Will Greece reach a deal with its EU creditors before the temporary extension of its bailout program expires on February 28? Or will the hardline members such as Germany, the Netherlands and Finland insist that “rules are rules” and lobby actively for Greece’s compliance with its debt repayment package, pushing for expulsion should Greece default?
However, 75 percent of Greek voters say they want to stay in the euro and Alexis Tsipras has stated his commitment to avoid a “Grexit”, but not at any price. Since the onset of the crisis, austerity measures dictated by the Troika have pulverized Greece’s economy: GDP has plunged 26 percent and lead to 25.8 percent unemployment, with more than half of the youth unemployed. Mr. Tsipras won the recent election on a platform of putting an end to the “humanitarian crisis” that has befallen his country. Greece, once called the “sick man of Europe” will get poorer still if the bulk of its €317bn debt mountain is to someday be repaid—if it ever will.
Europeans and the world community are watching the saga unfold to see whether or not Greece becomes a litmus test for debt restructuring. The new coalition of radical-left (Syriza) and right-wing (ANEL) is demanding a write-off of up to 50 percent of Greece’s liabilities. But any renegotiation or reduction of Greece’s debt could be perceived as a form of moral and procedural hazard, similar to that seen during the financial crisis when governments bailed out banks. Other nations could interpret such a move as setting a precedent and therefore justification for similar absolution of their debts, or abandoning reforms.
So who will blink first? Social protests by increasingly impoverished and jobless citizens are providing strong arguments to populist parties throughout Europe to forsake austerity measures. Although Spain, Portugal and Ireland have fared better than Greece, reaping the benefits of successful (albeit painful) reforms, the clarion call of extremist parties is strongly against austerity. Spain’s far-left Podemos party hopes to emulate Syriza in end-of-year elections and Marine Le Pen, of France’s far-right National Front party, has called Syriza’s victory a “monstrous democratic slap to the European Union”.
I personally don’t think a Grexit is in the cards, although as a Swiss citizen, I never would have guessed that the SNB would pull the plug on its franc-euro floor either! But I do believe that some face-saving formula is in store for Greece relating to the terms of its debt (duration, interest payments) before it has to repay €3.4bn to the IMF in February-March. Frankly, there aren’t many appealing alternatives. Like two gunfighter antagonists, both sides appear to be buying time, escalating tension, adopting poker faces and polishing their guns; tensely awaiting their “high noon” debt showdown.