Greek Tragedy

In his spot for Radio Nova, Guillaume Duval lays out two possibilities under discussion for saving Greece: Make european taxpayers pay or make banks pay. Two alternatives that each entail political and economic risks.

People obviously are not succeeding in sorting out the Greek problem. Why is it so difficult to find an acceptable solution?

It's surprising, in fact, because Greek debt is, in itself, a small matter. Greece counts for but 2.5 percent of the euro zone's GDP and even its enormous public debt of 350 billion euros represents but 3.7 percent of the area's GDP. In other words, if one had to end up forgiving half that debt, as is under discussion, that would represent a loss of 1.8 percent of the wealth that is produced annually in the euro zone, or less than 1 percent of the financial assets held by European households. That is certainly not negligible, but it doesn't compare, for example, with the impact of last month's earthquake on the Japanese economy …

So, why is there such a logjam?

Because all the prospective solutions may have severe consequences beyond the single case of Greece. In theory, the matter is simple: it's the Greeks who have spent too much public money without paying adequate taxes, so it's up to them to pay. No one wants to lend to them at a reasonable rate? O.K., governments may agree to lend to them in the place of private investors. That's what was agreed to, not without difficulties, a year ago. However, now, we realize this just does not work: the Greek debt is so high that there is no way the Greeks can repay it. The hellish austerity they've imposed on themselves has driven economic activity down to such a point that government revenues have grown less than forecast and the agreed objective of deficit reduction has not been achieved.

So, what can be done, then?

Two solutions are possible. The first would involve Europeans reimbursing part of the Greek debt instead of the Greeks. This solution, the simplest one, is not, however, acceptable, especially for German public opinion which does not want to hear about paying for these “Club Med layabouts.” The other solution, which the German government prefers, consists of forgiving, one way or another, part of the Greek debt. That solution would offer the advantage of reducing the burden weighing down the Greeks without taxing the rest of Europe's taxpayers. On the other hand, it presents many drawbacks. First of all, it would burden the banks, and the Greek banks, which hold a lot of Greek government debt first of all, pushing them into bankruptcy. It would also trigger payment on the “insurance policies” taken out on Greek debt default in the Credit Default Market, those famous CDSs, with consequences very difficult to predict in advance. Finally, it would lead to wariness with respect to all euro zone government securities and, consequently, a significant increase in interest rates for all European countries. In short, the ECB's [European Central Bank's] objections to this solution cannot be swept away with a casual backhand …

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O.K., so then where are we?

Not far. Absent a choice between these difficult options, for the moment, we're still upholding the fiction that the Greeks will pay … With the ever more evident risk that, fed up, they'll send us packing. And the euro along with us …

Leslie Thatcher is Truthout's literary editor, French translator and sometime book reviewer.