Greece's Punishing Deal

JUN 23, 2015 9:25 AM EDT

By Marc Champion

On Monday, the Greek government put before its euro-area partners (I use the term loosely) the first serious proposal for a deal on renewing its aid package since coming to power in January. Amid the general optimism that an agreement may now be in sight, thus avoiding the uncertainties of a Greek default and exit from the euro, there was also a strain of barely suppressed fury among some of Greece's peers.

Some of the euro-region finance ministers and leaders forced to assemble in Brussels for yet another emergency summit on Greece seemed to think Greece's change of heart was coming too late. On Sunday night, the Greeks sent out two proposals, the first of which was, apparently, a mistake, creating confusion. German Finance Minister Wolfgang Schaeuble reportedly remained caustic, pressing for capital controls even if a deal is done and Greece stays in the euro area. He was backed by his Irish counterpart, Michael Noonan.

Schaeuble doesn’t want more money to be spent replenishing Greek banks to compensate for the capital that's fleeing as a result of Greek Prime Minister Alexis Tsipras's brinkmanship. But I suspect there’s more to it: Schaeuble is also seeking demonstrative punishment.

It’s a counterfactual, of course, but there’s every reason to believe that had Tsipras come to the table with this kind of proposal in, say, January, he’d have secured a good deal -- and much faster. What the creditors have been seeking from the start was evidence that Greece was serious about reform and sticking to fiscal promises, to justify disbursing yet more taxpayers’ money. After all, the euro area has agreed to reduced interest rates and longer repayment times on Greece’s debt pile before. Tsipras would even have had the International Monetary Fund as an ally in pressing for debt relief.

Securing a deal by flirting with default has come at a cost. Last year, as Simon Nixon at the Wall Street Journal has pointed out, Greece was close to surplus, its economy was growing and it had regained access to the bond market. The rebankrupting of the economy and emptying of the Greek banking system has been self-inflicted. Yet Syriza is a coalition of radical parties; sitting down quietly with the IMF and cutting a somewhat better deal than his predecessor achieved wasn't an option for Tsipras or his team.

So instead of recruiting the IMF, Tsipras accused it of “criminal” pillaging of the Greek economy. And instead of courting Germany, he demanded Nazi war reparations. The victory currently in his grasp might be pyrrhic in terms of the economic costs it has inflicted on Greece and the euro area alike, but politically it would be a victory he could sell to his party. Predictably, Syriza members are fuming Tuesday that they will never submit to the compromises Tsipras has entertained.

Schaueble’s proposed capital controls may never appear. There was no agreement among the finance ministers, and the heads of state were much more upbeat in their comments once they took over on Monday. Capital controls would rob Tsipras of his win, if he can get his party to back the deal. They would expose the extent of the damage he has inflicted on the economy for all in Greece, Ireland, Spain and Portugal to see, even as Greece stayed in the euro and avoided default. If implemented they would be a kind of punishment for Tsipras, if not revenge.

To contact the author on this story:

Marc Champion at mchampion7@bloomberg.net

To contact the editor on this story:

Mark Gilbert at magilbert@bloomberg.net