The Syriza Strategy: no deal without debt relief

by George Hatjoullis

The talks are coming to a logical conclusion and it is not looking like a happy conclusion. There are many discussions going on about what Syriza was trying to achieve and how they have made a very poor show. The position that we are in is in fact not entirely surprising, as my few blog readers will no doubt be aware. The rock and the hard place are meeting and there is a clash.

Syriza is not playing games according to any Game Theory strategy. There was no subtle gambit. The Syriza opening position was that there was no point in continuing with asphyxiating austerity, whilst accumulating debt. They cannot be forced out of the eurozone and all that can happen is that they will be isolated from the TARGET2 clearing system and ELA assistance. I say ‘all’ but these are serious consequences, so it was not a risk taken lightly. However, the judgement was, all along, that without some easing of austerity and debt relief the alternative was not any worse. This may or may not prove to be the case but from the Syriza perspective it was not an unreasonable position to hold. What had 5 years of austerity and debt achieved? The prospect of more of the same was not appealing and Syriza came to power on a promise that they would not continue with more of the same. The polls may now suggest that the Greek people would rather concede than drop out of the euro but polls are not election outcomes (as the UK knows only too well). Syriza has a mandate not to concede certain things and only not to concede. Syriza can only make these concessions if there is an election and the electorate give them such a mandate. This is why Tsipras bangs the democracy drum and why he is risking so much. He was elected to do this.

The red line seems to be pension reform and specifically cutting 1% pa off the pension budget. Frankly, this is not a huge amount nor an unreasonable ask. So why does Tsipras not concede? The answer is the lack of any move by the Brussels lot on debt relief. If they offer debt relief he will concede on pensions. No such offer has been made. Why you may ask should Brussels (or should I say Berlin) concede debt relief? Primarily because it is clear that Greece cannot hope to reduce its debt burden on any realistic assumptions without such relief. The IMF has said as much and Oliver Blanchard said it again last night. Oliver Blanchard is the IMF chief economist! The problem is not that Syriza has been playing games but that Brussels has not confronted its own reality and offered any debt relief. Syriza made the need for debt relief clear up front and has been consistently (if quietly) supported by the IMF in this respect. Syriza will concede much on reform if, but only if, they are offered such relief. To concede without relief is beyond the mandate and illogical as they will leave themselves in a position that they believe is hopeless. It is immaterial that others may argue it is the only way in the long run. Syriza believes that to continue without debt relief is hopeless and no better than defaulting.  So they may as well default.

All the attention has been on the recalcitrant Greeks. Greece has been subjected to public vilification and as of this morning racist abuse. No one has stopped to ask why Brussels is not discussing debt relief when the IMF believes it to be essential. It is no wonder that Tsipras has become a little paranoid and speaks of political agendas. Just because you are paranoid it does mean people are not out to bring you down. So why no debt relief?

The simple answer is because this would constitute a fiscal transfer and this is deemed taboo under EU law. This is true but irrelevant. The ESM is not an institution governed by EU law. It was set up under inter-governmental Treaty and constitutes bilateral loans from member states to recipients. I pointed this out at the start of the debate in one of my first blogs. There is no legal impediment to the ESM conceding debt relief. Any claims to the contrary are untrue. The Brussels group is thus willing to risk full default by Greece rather than concede some relief. Is this really in the taxpayers interest? The Brussels group is willing to unleash an unknown outcome in order to avoid debt relief. It is clear to me which of the two parties is behaving irresponsibly.