Greece May Have Ruined Its Best Chance

APRIL 13, 2015

Inside Europe

Also published in The New York Times

By PAUL TAYLOR | REUTERS

BRUSSELS — Even if it survives the next three months teetering on the brink of bankruptcy, Greece may have blown its best chance of a long-term debt deal by alienating its eurozone partners when it most needed their support.

Prime Minister Alexis Tsipras’s leftist-led government has so thoroughly shattered creditors’ trust that solutions that might have been on offer a few weeks ago now seem out of reach.

With a public debt equal to 175 percent of output and an economy struggling to pull out of a six-year depression, Athens needs all the good will it can summon. It owes 80 percent of that debt to official lenders after private bondholders took a hefty write-down in 2012.

Since outright debt forgiveness is politically impossible, the next-best solution would be for Greece to pay off its expensive I.M.F. loans early, redeem bonds held by the European Central Bank and extend the maturity of loans from eurozone governments to secure lower interest rates.

“This step would save Greece’s budget billions of euros, while reforming the troika arrangement, eliminating the I.M.F.’s and the E.C.B.’s financial exposure to Greece,” said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics. The troika is the group of Greece’s international creditors: the I.M.F., the European Central Bank and the European Commission.

The move would lower the effective interest rate on Greek debt to less than 2 percent, far less than Athens was paying before the eurozone debt crisis began in 2009, and radically reduce the principal amount to be repaid over the next decade, giving Greece fiscal breathing space to revive its economy.

But if the economics make sense for Greece, the politics no longer add up for its partners. Mr. Tsipras’s denunciations of European Union-prescribed austerity, his demands for German war reparations and his cozying up to President Vladimir V. Putin of Russia, along with Finance Minister Yanis Varoufakis’s delaying tactics over negotiations and initial calls for a “haircut” on Greek debt, have dried up the reservoir of sympathy for Athens.

Creditors like Germany, the Netherlands and Finland are eager to keep the I.M.F. involved as an enforcer of fiscal discipline because they do not trust the Greeks to keep their word, nor the European Commission to hold them to it.

“They would prefer to provide debt relief on an annual basis so they keep leverage on Greece to stick to the program,” said Miranda Xafa, senior scholar at the Center for International Governance Innovation and a consultant on Greek debt.

True, Greece’s eurozone peers Ireland and Portugal, which received international bailouts after Athens, worked out an agreement with the European Union to pay off their costlier I.M.F. loans faster. But Dublin and Lisbon were able to do so by borrowing more cheaply from private lenders after completing their bailout programs and regaining access to the capital markets.

“Ireland and Portugal are governments in difficulty, but they are not difficult governments,” said Elena Daly of EM Conseil, a Paris-based sovereign debt management adviser.

Because Greece is stalling on its program and lacks market access, the only way it could pay off 24 billion euros, or about $25.4 billion, owed to the I.M.F. and redeem €27 billion worth of bonds held by the European Central Bank would be for the eurozone’s rescue fund to lend it the money. That would require eurozone governments to risk more money than the roughly €170 billion they have already loaned Greece.

Eurozone finance ministers promised in 2012 to “consider further measures and assistance” to ease Greece’s debt, provided it stuck to the terms of its program, which it has not done.

A referendum asking Greeks whether they want to stay in the eurozone at the price of painful economic overhauls, or a quick coalition change to bring in pro-reform centrists, may be Mr. Tsipras’s best options, even if they split his Syriza party.

Greece’s official creditors are torn between wanting to keep the country in the eurozone to avoid the precedent of an exit and fearing that if Mr. Tsipras manages to roll back austerity and secure debt relief, he could embolden like-minded political forces in Ireland, Portugal and Spain.

“So they want Greece to prosper and stay in the euro, while at the same time wanting the new administration to fall on its face and become an object lesson for other electorates who may be toying with the idea of rebellion,” Ms. Daly said.

Paul Taylor is a Reuters correspondent.