Europe can’t force Greece into never-default land
By Neil Unmack
The author is a Reuters Breakingviews columnist. The opinions expressed are his own
A German proposal to tie Greece’s future with a pledge to never default looks barmy. The euro zone already has a hard enough time getting Greece to reform its economy, partly because Greece can wield the threat of a messy default. When Athens reaches a primary budget surplus, as it should this year, it will be in an even stronger negotiating position because it could then default on bailout loans and still pay for the government’s expenses.
Germany has come up with the idea of forcing Greece to prioritise international debt repayment over domestic bills. The euro zone would then be assured it would get its money back. This in turn would make it more credible in pressuring Greece into speedier reforms, since the Greeks themselves would feel the pain of non-compliance.
In a way, the German proposals are already a reality. Greece is delaying payment on 6.5 billion euros of domestic bills, such as payments to civil servants, while honouring, so far, its obligations to international creditors.
But there is a limit to how far the Greeks can subordinate themselves to foreign lenders. And there seems to be little legal basis for prioritising international creditors. Even if Greece were to pass a law enshrining the obligation to service debts above all other payments in its constitution – as Germany seems to wish – nothing could stop the Greek parliament from changing the law later on.
No international court has the authority to force a country to pay its debts. Even the International Monetary Fund’s preferred creditor status is based on a gentleman’s agreement. Greek taxpayers may put up with arrears on some payments, but it would be politically untenable to subordinate them to all international creditors over the long term. Even after the 200 billion euro swap with private sector bondholders, currently being negotiated, Greek debt may need to be written down. If German plans came to fruition, membership of euro zone could amount to economic helotism.
By presenting the Greeks with such an unpalatable and unrealistic option, the Germans may have wanted to force Greek politicians into a stronger commitment to reform. But such posturing will mostly give Greek anti-euro sentiment an extra nudge.