Syriza's cunning debt plan to save Greece

Supercool Greek finance minister Varoufakis brings his wacky rescue plan to ECB president Draghi.

by Adam Gale
Last Updated: 12 Feb 2015

Let's face it, finance ministers aren't exactly known for effortless cool. They're more 'sitting at the front of the class with colour co-ordinated notepads', than 'smoking behind the bike shed'. This is why Yanis Varoufakis is such a breath of fresh air.

If Greece's new finance minister gives off a trendy professor vibe, that's because he was one, teaching game theory at British and Australian universities for 20 years. The leather-jacketed economist has been on a charm offensive over the past week, touring European capitals to gain support for Syriza's solution to Greece's debt problems, but he may find European Central Bank (ECB) president Mario Draghi a reluctant pupil.

The two are meeting today to discuss the debt crisis, which has reignited since Syriza stormed to power in January. The ECB is a crucial member of the troika that bailed Greece out in exchange for hated austerity measures, and it'll need some convincing if it's to relax those measures as Syriza wants.

An 'alternative' rescue plan

At the heart of Varoufakis' plan is reducing the budget surplus from its current 4% rate to finance an increase in spending, together with replacing Greece's outstanding bailout debt with bonds linked to  economic recovery.

It also involves the issue both of 'perpetual bonds', which are never redeemed but still pay interest, and short-term bonds to keep the economy going while the expected recovery takes off. Crucially, it does not involve writing off Greece's  €300bn (£225bn) debt, as Syriza had promised in its election campaigns.

This strategy has won some supporters. The markets showed their confidence in it with an 11.3% rally in the Athens stock exchange and 1% reduction in Greek bond yields on Monday, while several dovish European leaders have made conciliatory noises.

After meeting Varoufakis, Italian PM Matteo Renzi said Europe should be talking about growth as well as austerity, while UK chancellor George Osborne said it was time for 'competency over chaos'. Even US president Barack Obama stuck his oar in the Atlantic. 'You cannot keep on squeezing countries that are in the midst of depression,' he said.

Europe's response

The ECB is showing few signs of listening so far. One official told the FT it 'will play hardball' over attempts to relax the conditions of the bailout, which expires at the end of the month. Crucially, it hasn't cleared the way for the short-term financing  aspect of Syriza's plan. This requires the ECB to extend the insurance on Greek treasury bills to €25bn from its current €15bn.

If Greece doesn't have this insurance or access to emergency loans, which depend on it swallowing the ECB's bailout conditions whole, it would be left adrift once the bailout expires. Deposit flight would likely cripple its banking system, triggering capital controls, an exit from the Euro and another huge financial crisis. Gulp.

But can Europe really push Greece that far? Draghi and German chancellor Angela Merkel must know that Syriza simply can't swallow austerity measures whole, as though the election never happened. It's a political impossibilty.

It's true that in Germany too, this is a matter of politics more than principle. Going easy on the Greeks would cost vital votes for Merkel. But when it comes to this standoff, the Greek game theorist has the advantage.

Greece may not seem to have much leverage, but its willingness to concede a little and sheer inability to concede a lot actually puts it in a very strong position. Ultimately Greece cannot pay the debt back, even if it wanted to. Pushing for payback will only result in economic catastrophe for everyone, so the best outcome Germany can actually get is forgiving at least a portion of the debt.

There may be hard talk, but a compromise involving some form of gradual relaxation and bailout extension is still the most likely outcome.

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