As anti-austerity Syriza rises in the polls, threatening a crisis, experts are starting to believe default might be best for everyone

Forgiveness: it’s a rare enough quality in family life, let alone international policymaking. But if, as the polls suggest, the populist Syriza party wins next weekend’s Greek election, Athens will be asking its European brothers and sisters to forgive and forget some of the €317bn (£240bn) it still owes, so that its economy – and society – can recover from more than six years of austerity and recession.

Instead of the defiant tone that once saw Syriza’s leader, Alexis Tsipras, threatening to ditch the euro altogether, the party now hopes to negotiate an agreement with Germany and other creditors that could allow Greece to remain in the single currency – but set it on the path to recovery.

London-based pressure group Jubilee Debt Campaign, which has studied the fate of heavily indebted countries around the world, says Greece is right to demand a more generous approach from its creditors, because although it has received an extraordinary €252bn in bailouts since 2010, just 10% of that has found its way into public spending.

Much of the rest poured straight back out of the country: in debt repayments and interest to its creditors, many of them banks and hedge funds in the core eurozone countries, including Germany and France; and in sweeteners to persuade lenders to sign up to the 2012 bond restructuring that helped prevent the country crashing out of the euro.

In effect, the “troika” of the European Central Bank, the International Monetary Fund and the European commission has simply replaced the banks and the hedge funds as Greece’s paymasters. The country’s overall debt burden has actually increased in the almost five years since it was first “rescued”, and of the amount still outstanding, 78% is now owed to public sector institutions, primarily the EU.

What Greece owes

Stephany Griffith-Jones, an economist who is an expert on debt crises in developing countries, says: “They have got quite a lot of relief already; but a lot of that money that came to the government has gone to servicing the debt, including to the private banks. It wasn’t really money to help the Greeks. This is exactly like when I used to study Latin America in the 1980s: then, it was American and British banks, now it’s German and French banks.”



She quotes former US labour secretary Robert Reich, who described America’s bank bailouts as “capitalism on the upside and socialism on the downside”.

In fact, leaked minutes of the 2010 IMF meeting that agreed the bailout for Greece showed that Latin American countries scarred by their own experiences expressed deep disquiet about the policy.

Argentina, which is still being dogged by wrangles with its private-sector creditors more than a decade after first defaulting in 2001, said debt relief should be on the table, and warned: “It is very likely that Greece might end up worse off after implementing this programme.”

Brazil said the bailouts “may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions”.

That’s precisely the point made by Jubilee Debt Campaign: the reckless lenders that poured speculative cash into the country in the runup to the crisis escaped largely unscathed (though they were forced to accept some reduction in the face value of their bonds – known as a haircut – in the 2012 restructuring that accompanied Greece’s second emergency bailout). It has been a very different path to that taken in Iceland, which forced foreign banks to take heavy losses and has since seen its economy bounce back strongly.

In some ways, now might seem a strange time for Greece to send out a cry for help. After five years of harsh spending cuts and tax rises imposed at the behest of the troika, the Greek government has battled its way back to a so-called primary surplus. That means if it wasn’t for having to pay the interest on its debts, it would no longer be living beyond its means.

Yet look up from this dry financial calculus, and it is clear the Greek economy is in a parlous state. Unemployment was more than 25% at the last count. GDP has collapsed by more than 30% since its peak before the crisis: a decline comparable only to that seen in the US during the Great Depression.

And it’s not clear that there is any way out. Greece’s debts are still worth 175% of its GDP: well above the level considered sustainable by economists. Despite repeated wage cuts that should have made its exports more competitive – a process known as internal devaluation – the country is running a large trade deficit. And the rest of the eurozone – Greece’s major export market – is sliding towards recession.

Syriza, whose view is backed by a growing chorus of experts, would like to see an international creditors’ conference for Greece, along the lines of the meetings that drew up the London Agreement in 1953 that gave generous debt relief to West Germany (see below).

The starting point, instead of what financial markets would bear, would be what Greece could reasonably manage to pay while rebuilding its shattered economy – and maintaining social cohesion, which has been stretched to breaking point by repeated salary reductions for public servants and cuts in the country’s public services.

With a bit more fiscal leeway, Syriza argues it could raise public sector salaries, slow the pace of job cuts and raise pensions, helping to boost consumer demand and rekindle economic growth. It would also like to raise more in taxes from wealthier Greeks.

Facebook Twitter Pinterest Anger over austerity was already running high at elections in 2012; now Greek voters seem ready for radicalism. Photograph: Aris Messinis/AFP/Getty Images

Francesco Caselli at the London School of Economics says: “I think it’s a pretty reasonable thing to be asking for.” He adds that even if Syriza cannot persuade its eurozone neighbours to slash its debt burden, it should at least demand a relaxation of the cuts regime. “Perhaps more importantly, what they should be asking for is a less demanding path of fiscal consolidation: less aggressive austerity.”

Ann Pettifor of the economics thinktank Prime says: “To me, it’s about process and what would be fair. We should do for Greece what the Allies did for Germany, and say that she should not spend more than 3% of her export revenues on debt servicing, and that should be the deciding factor.”

A survey of economists by Bloomberg last week found that more than half expect Greece to receive some debt relief after the election – notwithstanding the purported “moral hazard” of bailing out prodigal debtors.

In fact, some experts believe letting Greece off the hook for at least some of its borrowing would be good not just for the Greek people, but for the rest of the eurozone too. The Oxford economist Simon Wren-Lewis argued that point in a blogpost last week. “In reality, reducing the debt burden in Greece (and probably elsewhere) would do the eurozone a lot of collective good,” he said. “Greece would be able to relax the crippling austerity that has had disastrous economic and social consequences. The core countries and the IMF could at least partially undo the mistakes they made from 2010 to 2012 in first delaying default, and then failing to impose a complete default.”

He added: “German taxpayers might be encouraged to understand that the problem since 2010 has not been Greek intransigence but the actions of their own governments in trying to protect their own banks and in dispensing unrealistic degrees of austerity.”

Support for the idea of a debt conference has also come from some surprising sources. German public opinion is generally viewed as opposed in principle to any more help for the Greeks. But Hans-Werner Sinn, president of the Ifo institute in Munich, one of the country’s key economic thinktanks, last week became one of the most prominent German voices arguing for an international summit to agree a debt write-off, from the pragmatic point of view that Germany is unlikely to get its money back anyway.

“Unemployment in Greece is now twice as high as it was in May 2010. Industrial production has plunged by 30% compared to its pre-crisis level. The country is sitting in a trap,” he said. Sinn also argues that Greece needs a devaluation to have any chance of recovering its competitiveness, which would require it to leave the euro temporarily.

Even if Syriza succeeds in forming a government and manages to convince its neighbours they should show it some forgiveness, coming up with a deal that is economically feasible and politically sellable will be a formidable challenge for international diplomats.

Indeed, Griffith-Jones argues that the best approach might be to kick off talks in private. “What’s important is not just the size of the debt relief but the way you do it,” she says. “Another risk is that they have a major bust-up and the markets panic.”

And Caselli at the LSE says he would not rule out the possibility that the end result of the delicate negotiations over the coming months is that Greece crashes out of the euro.

“It’s definitely within the realm of the possible,” he says. “Greek society has been – over the last five, six years – under a level of stress that is not sustainable for much longer.”

SECRET OF THE ‘GERMAN MIRACLE’

Germany’s “economic miracle” (or wirtschaftswunder), which saw the defeated country rebuild its shattered infrastructure to become a world-beating industrial powerhouse, was made possible by a deal struck in London in 1953, which saw half of the debts it owed to the rest of the world written off.

Since the global financial crisis of 2008, Germany’s has been one of the strongest voices advocating programmes of unflinching austerity for Greece and the other bailed-out European economies.

Yet in the wake of the second world war, West Germany managed to secure 15bn deutschmarks of debt forgiveness, in what became known as the London agreement.

The deal is less celebrated than the well-known Marshall plan, which saw US aid flood into Europe; but it was critical to Germany’s re-emergence as a major economic force.

Its creditors feared the threat from the communist east, and believed the West German economy must be allowed to recover. In a proposal drafted in 1950, the US, UK and France argued that “the restoration of German solvability includes an adequate solution for the German debt which takes Germany’s economic problems into account and makes sure that negotiations are fair to all participants”.

After talks that dragged on for several months in 1953, and included private sector lenders as well as governments, all participants agreed to write off about half of the country’s outstanding debt – much of it contracted before the Nazis had come to power, in order to pay off the reparations imposed on Germany after the first world war.

Crucially, it was made a condition of the deal that West Germany would only have to make repayments when it was running a trade surplus: in other words, when it had earned the money to pay up, rather than having to borrow more, or dip into its foreign currency reserves. Its repayments were also limited to 3% of export earnings.

Germany’s creditors therefore had an incentive to buy the country’s goods, so that it would be able to afford to pay them.

This approach was widely seen as helping to sow the seeds of the powerful export sector that has become such a dominant characteristic of the German economy over the past 60 years.