Syriza vs. the Troika

After barely a week following the Greek elections and Syriza’s victory, negotiations between the EU’s “Troika” of debt collectors — the International Monetary Fund (IMF), European Central Bank (ECB), and the European Commission (EUC) — and Syriza’s representatives have already begun to intensify.

Even before the elections and Syriza’s victory, threats were flowing from the Troika warning Syriza to abandon its demand that the Troika write off up to one-third of Greece’s 317 billion euro debt; that it continue with the Troika’s previously imposed debt payment structure agreed to by Syriza’s predecessor government; and that austerity programs continue to be implemented regardless of the hardship imposed on the Greek people after five years of economic depression.

The Troika are desperate. The northern European bondholders, investors, central bankers, and Euro bureaucrats that are the true faces behind the Troika, whose policies directly represent their interests, are confronted by a serious democratic challenge by the new Greece and Syriza government. A challenge that could spread like political wildfire throughout Europe if not contained.

That democratic challenge comes at a time when the Eurozone economy continues to weaken, deflation has set in, more northern and eastern European economies are slipping into recession, bond rates and yields are turning negative throughout the EU, currency instability is rising, USA demanded sanctions on Russia are biting deep into Euro business profit margins, the Ukraine is in economic collapse and demanding billions more in IMF and EC bailouts, and the war in Ukraine is intensifying again. Not a small short list of major problems, by any means.

And now Syriza and Greece, threatening to upset what the Eurobankers and Eurocrats had thought was a stabilized Euro government debt repayment system, paid for by austerity plans that they thought were safely assured for years to come!

The core problem with the Greek debt issue is that Greece’s current 317 billion Euro government debt is unsustainable and effectively condemns Greece and its people to a state of perpetual economic depression for decades to come should it remain in place. At 317 billion, the Greek government debt is nearly twice the GDP of Greece — officially 177 percent. No matter that 270 billion (85 percent) of the 317 billion euros are owed directly to the Troika itself — i.e. official agencies that could, if they wanted, write off much of the debt. No matter that Syriza’s position is that its demand for one-third write off does not include the 24 billion owed to the IMF and another 54 billion owed to the ECB, but is targeting the 142 billion Greece owes to the European Commission and its European Financial Stability Facility (EFSF) fund.  And no matter that, even as Greek-Troika negotiations begin, the European Commission is approving debt write-offs for Croatia while refusing to do so for Greece.

Although there is no crisis deadline for a negotiated settlement until the end of February, at the earliest, the Troika nevertheless is adamant on refusing to forgive any Greek debt. To do so would open a pandora’s box of potential problems, as they see it. And that may be true.

Here’s why: should the Troika agree to a partial Greek debt forgiveness — aka a write-off or haircut involving debt restructuring — it would set a dangerous (for them) precedent elsewhere. A write off would immediately result in not only a surge in Greek bond debt interest rates, which had already begun with Syriza’s election, but would undoubtedly set off bond rates rises in Italy, Spain, and elsewhere. If they write off Greek debt, they would have to deal with demands for other debt write offs as well. Bond values would plummet across Europe — and thus register significant paper losses for wealthy bond holders, both public and private alike. A collapse of government bonds would likely spill over to corporate bonds, and then possibly to Euro stock markets in turn as well. The chain reaction would largely negate the Eurozone’s recent move to inject $1.3 trillion in quantitative easing money into the Euro economy — itself designed primarily to boost Euro investors financial profits and capital gains. A Greek debt write off, in other words, could reverse other efforts to boost investors’ profits across the continent. So write-offs are the Troika’s “red line,” as they say.

The Troika faces other dangers in the Greek debt negotiations as well. A Greek debt agreement, write offs or no, raises the potential that other rapidly growing left and right political parties will be energized politically by any success Syriza may have in rolling back debt payments and/or stopping austerity policies imposed by the Troika in Greece and elsewhere. Not just the new Podemos party in Spain, but the right wing National Front in France, which would win national elections if held tomorrow in that country, or the UKIP party in the United Kingdom with elections there imminent, as well as other parties in Eurozone countries coming up for election. No doubt Euro politicians outside the Troika are keenly aware of the potential political consequences of the Greek debt negotiations and are whispering in the ears of the Troika’s bureaucrats as they head into negotiations with Syriza.

Then there’s another “economic front” that has the Euro bankers and Eurocrats currently on the defensive: that’s the growing movement within the Eurozone for not only a reversal of austerity programs, but for a new initiative for government infrastructure investing. The country bastions of the Eurobankers — i.e. Germany and Netherlands — have attempted to co-opt this movement for more government investment by proposing what is called the “Juncker Plan” — i.e. a token limited government program of government spending. By agreeing to a Greek debt write-off, the Troika would give impetus to growing demands within Europe that governments step up their infrastructure and government spending in lieu of continuing austerity programs.

And there’s yet a fourth problem the Troika now faces: the Euro-wide business-driven initiative to force government to introduce structural reforms, in the form of so-called “labor market” restructuring. Those reforms directly target working class jobs, wages and benefits — as a way to boost worker productivity, the benefits of which would accrue almost totally to Euro businesses.  Should too many Troika concessions be made in current Greek debt negotiations, the drive for structural/labor market reforms may slow as well, as working classes throughout Europe realize the Syriza example shows that resistance is not futile any longer.

But there are write-offs and there are write-offs. There are direct public declarations that part of the debt need not be repaid, i.e. is forgiven. And there is financial “smoke and mirror” engineering that amount to de facto write-offs in the long run, even though it appears write-offs are not taking place in the short run. And that’s where negotiations most likely could be headed.

Syriza’s pre-election position was always that one third of the Greek debt should be written off, targeting the European Commission’s (Brussels) EFSF’s 142 billion euro holdings of Greek debt. Writing off IMF and/or ECB debt has never been proposed by Syriza. Its leaders are savvy enough to know the Eurocrats at the IMF and ECB could never agree to write-offs. To do so would almost certainly implode the Eurozone financial system itself. But the European Commission and its EFSF is another story.

Syriza’s program also includes halting the firesales of Greek public investments to predatory Euro and American vulture investors; raising the minimum wage back to pre-2010 debt levels, hiring back 10,000 needed government workers, stopping further cuts to pensions, and going after the tax fraud and avoidance by Greek businesses and investors which is notoriously rampant. In just the first week in office, Syriza has begun to reverse all the preceding elements of its austerity program, with more no doubt to come.

In other words, for Syriza, reversing austerity is the key strategic objective, even more important than immediate debt forgiveness. Only reversing austerity raises the possibility of a return to economic growth — which in the long run is the only way out of Greece’s current perpetual debt trap. The debt restructuring is secondary; the end of austerity is primary. The former can be obtained via “smoke and mirror” financing; the latter must be real since the Greek people will immediately know if they are being “gamed” again by yet another political party. Syriza’s political instincts are therefore correct to focus on dismantling austerity as primary.

At the beginning of this past week, Yanis Varoufakis, the new Finance Minister in the Syriza government, signaled to his Troika counterparts that debt forgiveness was not a priority — at least according to the business press. This immediately resulted in stock and bond markets recovering the major losses of the previous week when it appeared Syriza and Varoufakis were taking a hard line and that debt forgiveness was a prerequisite, a sine qua non, for negotiations. If true, as the business press reports, that Syriza and Varoufakis have dropped the debt forgiveness demand, what’s the significance of this apparent basic shift in Syriza positions?

Last week Varoufakis toured the financial capitals of Europe, demanding a Europe wide conference of governments to address the Greek Debt problem, declaring it a problem not just for Greece but for all of Europe, which of course it is. He called for a Euro wide public infrastructure investment program — referring to the 1953 London Conference that wrote off Germany’s war debts (ironically). He declared Syriza was not interested in just another “roll over” of existing debt. Nor was Greece interested in an extension of the current debt and austerity arrangements past the February 28 coming deadline. He declared he would refuse, if necessary, to negotiate with Troika representatives, indicating meetings should be with European heads of state. And he repeated Syriza’s pre-election policy of debt write-offs. A definite hard line position across the board, signaling to the Troika that two could play the threat game.

So what’s changed at the beginning of week two in negotiations? Why has Varoufakis and Syriza backed off the hard line? Or have they?

Publicly, the Troika continues to float various unofficial proposals by means of leaks to the press: i.e. to lower Greek debt repayments by extending the maturity of the debt from current 30 years to up to 50 years, if necessary; to lower interest rate payments; to pay Greece the 4 billion Euros that the ECB had already earned by holding Greek bonds; to extend the current bailout arrangements for six more months after February 28. Others less official are suggesting the Troika might even consider suspending principal and interest payments for a period, or set up an entire new debt arrangement with the European Stability Mechanism (ESM), another debt bailout fund. All the preceding likely represent the Troika’s opening bargaining position.

Meanwhile, on Monday, February 2, France offered to step in to mediate the upcoming negotiations between Greece and the Troika — no doubt thus offering to play “soft cop” to Germany’s “hard cop” in the negotiations to come.

It was also on February 2 that Greek Finance Minister, Varoufakis, reportedly backed off Syriza’s demand for debt forgiveness.  But he then offered a new proposal that was significant: to swap old debt for new Greek bonds that would be linked to economic growth. What the latter proposal represents is no debt repayment if there’s no Greek growth — and that means an end to austerity programs that the Troika has insisted on for years as a condition of past loans and debt to Greece. The substitute proposal reveals clearly that Syriza’s primary objective is to roll back austerity first. Then restructure debt.

So Varoufakis and Syriza have cleverly turned the Troika’s formula of more austerity in exchange for more Troika loans on its head. Now its end austerity if you want any repayments of debt!

Henceforth, in Syriza’s view negotiations are not about how much more debt will be given Greece in order to roll over past debt and continue making payments, as previously has been the case since 2010. Now the negotiations will focus first on ending austerity, on restoring growth and incomes of the Greek people, and the extent of that restoration will determine how much debt is repaid and when.

So the positions of the parties at the negotiating table are: continue Greece’s austerity and economic depression in order to make debt payments ad infinitum (Troika position) vs. end austerity first and grow out of the debt trap imposed by the Troika (Syriza position).

But the negotiations have only just begun. It will be interesting to see if the Troika buys into the new formula proposed by Syriza and agrees to lift austerity now in order to receive some kind of debt repayment in the future. If so, the tough negotiations will be over how much of prior austerity is ended, how fast, how much debt repayment is tied to economic growth and how is that growth estimated.

The next milestone in negotiations arrives on February 4, when the ECB decides whether to provide more interim liquidity assistance to Greece. If the ECB, a Troika member, balks, that will be a sign the Troika has not yet bought into the new formula proposed by Varoufakis and Syriza.

Another important milestone will occur on February 12, at the next meeting of European Union leaders in Brussels.

If the Troika and Europe’s leaders recognize that the old Troika formula of more austerity in exchange for more debt is an economic dead end, and that Greece may well exit the Euro if it insists on continuing that old formula, then that recognition will mark the beginning of the end for austerity in Europe.

But if they don’t, and they continue to adhere to that dead-end policy, it will set Europe on a path of not only a Greece exit from the Eurozone, but an eventual collapse of the Euro itself. And that will mean even more massive losses for investors, and an almost assured descent by Europe into a deep and sustained recession.

It will be interesting, to say the least, to watch the coming weeks of negotiations between Greece and the Troika. Greece may be small in size and economically, but right now it is the lynchpin for the economic future of Europe. Syriza and Greece are in a good bargaining position. It remains to be seen how well they play their cards.

Jack Rasmus is the author of the forthcoming book, “Systemic Fragility in the Global Economy,” Clarity Press, 2015; and Epic Recession: Prelude to Global Depression and Obama’s Economy, both by Pluto Press, 2010 and 2012.  His blog is jackrasmus.com and website www.kyklosproductions.com.


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Jack Rasmus is author of the recently published book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.

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