The Greek debt problem

by Véronique Queffélec on juin 4, 2015


Should an agreement be reached this week, it will not be a sustainable one.

Many European newspapers affirm that an agreement will be found tomorrow, to allow Friday’s payment to the IMF to be processed and avoid a Grexit. However, it is our assessment that if an agreement is reached in the following hours, it will address the short-run only. Whether an agreement is reached does not really matter, the confidence in finding a long-term agreement in the coming weeks is the only factor that shall be considered. The possibility of a Grexit will remain high even though it is not more likely than the other scenario where Greece remains in the Eurozone. What is certain is that the Grexit question will still be raised in the coming weeks. Furthermore, the recent involvement of F.Hollande and A.Merkel let us think that we are talking about a political solution, not a financial one.

Key Analysis

Many points of disagreement remain but it is predominantly a matter of trust and confidence.

Tsipras explicitly said more flexibility on the pension reform was out of the question. It is unquestionable that Greek citizens perceive low pensions. However, the ECB and the IMF do not want them to lower pensions but rather to make them more equal. There is tremendous inequality in the Greek pension system. If Tsipras does not accept to discuss a fair pension system, a long-lasting agreement will no be found. The only alternative would be a sharp increase of VAT, which would kill the Greek economy.

We believe a long-term agreement will not be found soon because Greek lenders need some pieces of evidence to give space to Tsipras. There is no current proof of Tsipras’ government success.

Will an agreement this week end the idea of debt rescheduling? Not at all, it will very likely postpone the problem without solving it. The agreement will only allow the June 5 payment due to the IMF to be processed.

Would Tsipras need to form a new government?

This would certainly fill-in part of the gap between the current level of trust the lenders have and the level required to achieve a significant and responsible agreement. By forming a new government, Tsipras would acknowledge that his electoral program was not realistic and that the former government was partly right. In this case, it would be a matter of politics. Can the two main parties form a consensual government? It is very hard to answer this question today. Putting back some experienced people on the Greek side of the negotiation table would also help to build trust.

Are the IMF and the ECB still on the same path? Many newspapers maintain they do not share the same point of view anymore. We believe they do. Even if they approach the Greek debt crisis from a different angle and with different backgrounds, their diverging points are not a matter of points of view but rather of methodology.

Is a “double Eurozone” a solution? Right now, it is not. Greece will stay or exit the Eurozone but such an idea is not on the ECB leaders’ mind at the moment.

Would a Grexit be definitive? For years, the EU leaders have been claiming that it was impossible to both exit the Eurozone and remain in the EU. However, there seems to be more and more debate about a way to allow Greece to temporarily exit the Eurozone, adopt a Greek Euro-Drachma that would mechanically be depreciated and give some air to the Greek economy. This would boost the price-competitiveness as well as tourism in the country. However, it would worsen the Debt situation. Nevertheless, a rescheduling process may be adopted to strengthen the Greek economy, stabilize their new currency and finally reintegrate the Eurozone. As of today, this is not the likeliest solution, but it shall not be neglected.