The good news is that the Greek government survived a vote of confidence shortly after midnight last Tuesday, keeping the country from defaulting on its debts. But that's also the bad news, because it means the government will proceed with a vote this week on the stringent austerity program demanded by the European Central Bank and the International Monetary Fund. The draconian program is a condition of the next installment of the loan payment, money that is dribbling into the Greek republic only as long as it keeps cutting its budget.
Under the terms, Greece will have to raise taxes and cut spending by some 28 billion euros, or about $40 billion - a cut that would have the same effect as an immediate $1.5 trillion budget cut in the U.S. A retrenchment of this magnitude is the last thing that makes sense in a deep recession.
Greece will also have to privatize some $73 billion of its public assets. It doesn't gain Greece anything, since either the government or the citizens will have to pay to use the newly privatized services. It is a onetime windfall that will go directly to pay creditors.
What should Greece do? Sometimes, it makes more sense for a heavily indebted nation either to default or to hold out for a debt restructuring as a condition of partial repayment. Often, creditors recognize the futility of trying to get blood from a stone. But in current circumstances, the central bankers seem determined to bleed nations like Greece dry. The fact that Greece is a member of the Eurozone adds to Greece's financial captivity.
In other circumstances, creditors have agreed to much deeper restructurings, stretching out loan payments, and taking reduced principal and interest payments as an alternative to a flat-out default. When Argentina couldn't pay its foreign creditors in the 1990s, bondholders ended up losing about 70 cents on the dollar. Argentina could not get new international loans, but freed from the millstone of crushing past debt, Argentina was able to grow at annual rates of 8 percent.
Some of this was the result of lucky timing. Argentina has benefited from a boom in commodities, and it is a major commodity-exporting country. Still, the fact is scores of nations in the 20th century received much more generous debt relief than is being offered to the Greeks, and were freed to resume economic growth.
Greece may actually have more leverage than it is using. The EU, the European Central Bank (ECB), and the IMF are terrified of a Greek default, because of money owed to French and German banks and to the ECB itself. Some of the Greek government bonds are insured with credit-default swaps, meaning that issuers of those swaps would suffer heavy losses in the event of a default or even a restructuring. There is worry that a Greek default could be devastating to the Euro. Because of all of the speculative bets for and against a failure by Greece to pay, the costs to global finance could be far higher than the actual amount of the money Greece owes.
But all of this provides some leverage to the beleaguered Greeks. Instead of a Socialist government agreeing to terms that will condemn Greece to a generation of economic stagnation, it would be splendid if the government under Prime Minister George Papandreou declared that the proposed austerity terms were simply too harsh and refused to put them to a vote. That would likely get the attention of its creditors, and Greece might well end up with more sensible terms.
It's true that Greece's public finances are a mess. Its tax-collection machinery lets too many wealthy Greeks off the hook. But suppose the Greek government asked the EU to take over and modernize its tax-collection machinery in exchange for rather more generous restructuring terms. Rather than a fire sale of national assets and a program guaranteed to consign Greece to depression, the result could be an equitable system of taxation of those who can afford to pay.
At moments like this, the weak sometimes can display more power than the strong. The script calls for the Greek government to meekly agree to the creditors' terms, and suffer accordingly, to save Europe's banks from their own speculative behavior. Greece deserves better, and fans of Greek drama are awaiting a less tragic outcome.
