06-18-2011, 07:05 AM
I have maintained for some time that the Greek government has had more bargaining power than it has used, and the past week's events seem to confirm this. Because of the massive opposition to further economic self-destruction -- the latest polls show that 80 percent of Greeks are opposed to making any more concessions to the European authorities -- the Greek government has so far been unable to reach an agreement with the IMF for the release of their latest loan tranche on June 29. So what happened? The IMF is going to hand over the money anyway, while the European authorities (who are in control of IMF decision-making on matters of Greek economic policy) continue to quarrel over how long they will postpone Greece's inevitable debt restructuring, roll-over, or whatever they choose to call it. That's because the prospect of a disorderly default -- as would be triggered by the IMF simply sticking to its program and not lending Greece the money -- is too scary for the European authorities to contemplate. For this reason the many news articles about the possibility of a financial collapse comparable to what happened after Lehman Brothers went under in 2008 are somewhat exaggerated. The European authorities are not going to let that happen over a measly $17 billion loan installment. The events of the past week were all a game of brinkmanship, and the European authorities had to blink because the Greek government, as much as it wanted to, couldn't get approval for the deal. A democratically accountable Greek government would take a much harder line with the European authorities. For example, they could start with a moratorium on interest payments, which are currently running at 6.6 percent of GDP. (This is a huge interest rate burden, and the IMF projects it to increase to 8.6 percent by 2014. For comparison, despite all the noise about the U.S. debt burden, net interest on the U.S. public debt is currently at 1.4 percent of GDP.) That would release enough funds for a serious stimulus program, while they negotiate with the authorities for the inevitable debt write-down.