Europe can’t force Greece into never-default land

February 2, 2012

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.


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Well, Merkel is in China asking for them to take on a larger role in the Euro crisis. Who knows, maybe they will invade Greece with unprecedented cheaper labor and goods from the labor, evict the Greek population and then she will be happy to see at least one nation is living on 3 cups of rice per day.

Posted by Intriped | Report as abusive

It has been difficult to get the Greek people to pay taxes when that money was used to meet their own needs and the needs of their fellow Greeks.

It will certainly be difficult to get them to hand over their first fruits to the Troika as their own needs increase.

Posted by breezinthru | Report as abusive

All sounds nice except for one thing. with the kind of leadership now running Greece, it will never get to that primary budget surplus. So no worries. Mendicancy forever.

Posted by almally | Report as abusive

the intention is to remind greek politicians of their promise

but the end game is an orderly default

greece will return to candidate status to rejoin the eurozone sometime in the (far far distant) future

the imf and germany are making an offer IF greece sticks to its previous promise

but it will be the greek politicians who will renege and inevitably bring about an orderly default

the fiscal policy agreement of december 2011 is to ensure that there is only one defaulting country

personally, it is better to deprive the fakelaki political class of debt funding for at least two generations

after that there is hope of a younger greek generation more capable of fiscal management and honesty towards its fellow citizens

Posted by scythe | Report as abusive

Reality 1 if Greece was to use its old dracma currency, it would have been devaluated by at least 30 % since theyr country is neard default and they would have ended with an international debt in euros.
reality 2, having a wage cut of 5 or even 10% is not that bad provided that international lender already lost 100 billions and that Greec will receive 130 billions euros more if they comply.

I guess EU is just being to nice with such a small country, The Eu might better use those 130 billions euros to help countries that are really willing to change.

Posted by CNDMX | Report as abusive