Much hangs on the interpretation of a word, and in the case of Greece and the Eurozone that word is: insolvent. New Greek finance minister Yanis Varoufakis has been unusually frank, likening his country’s case to that of a jobless person being advised to take out advances on her credit card to pay the mortgage.
“Would you advise them that they should continue to take these tranches of loans from the credit card in order to deal with what is essentially an insolvency problem?” Varoufakis said. “This is the trouble over the last five years with Greece. Our European partners and the previous Greek government have been extending and pretending.”
Keeping up the pretence that one can honour one’s debts if only given room to manoeuvre and time is an old — if not glorious — tradition among the deeply indebted. Coming straight out and copping to insolvency, on the other hand, is not.
That’s because certain things tend to follow from an admission of insolvency. Creditors decline new advances, existing loans, where possible, are called and the debts of the insolvent, Greece, are no longer acceptable as collateral.
Guntram Wolff, director of the Brueghel think tank, argues that Varoufakis has set a rapid clock ticking, making its debts theoretically beyond the pale for the European Central Bank and creating a pressing need for a new deal.
“When a finance minister declares the insolvency of his country, then the quality of all the debt he has issued should fall below the relevant thresholds for Emergency Liquidity Assistance as well as standard monetary policy operations. While I do not believe the ECB will be so consequential as to do this immediately, I also cannot believe that it will just continue lending for a long time,” Wolff wrote. “By talking about insolvency, he has raised the funding needs for Greece’s banking system and made government fund raising on capital markets impossible.”
Important to remember that extend and pretend as a strategy, while obviously unfair to many participants, can sometimes work as a means of keeping an entity ticking over. Many leading US banks were very likely insolvent during the crisis.
Like all relationships, good and bad, extend and pretend requires the participation of two partners, the creditor and debtor. All true, but these things are never simple, and far less when, as in Greece, the insolvency includes a euro member state.
While Greece’s liabilities may shortly exceed its ability to repay, its creditors and partners maintain that with current low interest rates and a very long repayment schedule its ongoing debt maintenance burden is not out of line with that of France, for example.
Varoufakis sees the situation as a debt deflation spiral, in which the conditions imposed on Greece stifle demand, pushing prices and output lower and making the debt ultimately impossible to repay without ruin. There is some justice in this position.
Varoufakis’ slapping down of the insolvency card is best seen as a gambit to bring the other side more rapidly to the table and to extract better concessions. As for the ECB, it seems to be standing on ceremony, maintaining its hands will be tied as for extending Greek banks more credit when the Greek programme extension expires at the end of February.
“We (ECB) have our own legislation and we will act according to that,” ECB council member Erkki Liikanen said. That angle, that the ECB will have to follow its rules and that Greek debt and its banks will be high and dry, is heavily overplayed, argues Karl Whelan, an economics professor at University College Dublin.
Whelan believes that even in March Greek access to ECB enabled credit will be based on discretionary decisions rather than mechanical outcomes. Greece and its negotiating partners can conceivably limp along together because both the ‘rules’ and the meaning of insolvency are such woolly concepts, offering insulation if not clarity.
Thus we have two sides, both seeking to pressure the other by creating what could be a false urgency to negotiate, and both hoping the other crumples and gives way. Meanwhile, capital, sensibly, flees Greece and the chance rises that an overplayed hand by either side leads to a bank run.
