Standoff

Once again, the Eurozone teeters because of Greece. The rest of the global economy is jittery. Volatility sweeps all the currencies, without exception.

The newly installed left-wing government swept the last elections on the promise of scuttling the austerity program. That program was enforced on the Greeks by the rest of Europe as a condition for a massive financial bailout.

Before the debt crisis set in, a succession of populist governments borrowed heavily to finance a wide array of subsidies. Those subsidies were politically profitable for the populist parties. They won election after election promising more subsidies despite chronic budget deficits.

That was, of course, unsustainable. At some point, the shit hits the fan in the form of defaults on the debt. The defaults, in turn, cause a financing freeze.

As a condition for further financing, the European Central Bank and individual foreign governments such as Germany asked the Greeks to set their fiscal affairs right. That means subsidies will have to be withdrawn. Tax collection will have to be improved. The chronic budget deficit will have to be reduced.

No one, after all, will be willing to lend money without assurance of repayment. The deeper into the debt debacle Greece goes, the higher the risk of lending money to Athens.

We know, from our own experience with a debt crisis, how painful such conditions could be. In Greece, this pushed a great number towards the poverty line. Without subsidies, everything became more expensive for the consumer. The Greeks chafed at the “structural reform” imposed by the international financial community.

The difficulties ordinary citizens faced as a result of “structural reform” were so tempting for the politicians to exploit. The leftwing Syriza party did not miss the opportunity to pander to ordinary citizens, promising them relief from the austerity program. They campaigned for control of government on the platform of dismantling austerity (which translates into returning the subsidies).

Not surprisingly, the populist agenda produced a landslide victory for Syriza. Now that the party is in power, they will have to push their impossible agenda. The new government will have to do the impossible: get the rest of the Eurozone to write off the Greek debt and, at the same time, get the Europeans to lend Greece even more money to reflate the domestic economy.

The Greek external debt now stands at $273 billion. That is a lot of money by any measure. It is money owed the ECB as well as private financial houses that risked buying Greek bonds.

In order to win their impossible demands, the new government in Athens threatened the rest of Europe with a Greek withdrawal from the euro.

In effect, they imagined they could force the rest of Europe to accede to their impossible demands by pointing a gun to their own heads. Moving out of the euro at this time would be suicidal. If Greece begins to print out its old currency, no one really knows now how the exchange rate will go.

Will the other European banks deal with this new currency? Will importers agree to accept this new currency as payment for what they ship to Greece?

Most important, will the Greeks themselves trust their new currency? Or will there be a rush to dump the new currency in exchange for whatever euros are still available in the market? In the latter case, the value of the new currency will simply drop through the floor.

The ECB was simply not impressed by the new Greek government’s threat to exit from the euro (a prospect now referred to in the media as “Grexit”). When someone points a gun to his head, threatening to blow himself up, the counter-party is not likely to yield concessions.

Since the ECB was not impressed by the threat from the new government in Athens, the new Greek leaders frantically searched for a new strategy. For a while, it did seem like the Syriza government had softened its position and was willing to accept some form of “structural adjustment” in exchange for new money.

The ECB kept itself ready to lend more money to the Greeks but only on their own terms. The moneymen of Europe will never agree to throw in good money after bad – even as they wanted to keep Greece in the Eurozone and avert a complete meltdown of the Greek economy.

This is where the negotiations stand between the Syriza government and the ECB.

Each party on the negotiation appear ready to wait the other out.

If the Syriza government agrees to the ECB position, it will be betraying the political platform on which it was elected just recently. Public disappointment will be intense. They new government could fall if its angry constituents decide this party duped the electorate with delusory promises. Outrage could pour out to the streets.

The Syriza government might admit it had run into a blank wall, an unresponsive financial community that will not let out a loan unless the borrower shows signs of accepting fiscal discipline to improve its ability to pay. This could force Greece to carry out its threat of withdrawal from the Eurozone, if only to keep the leftwing government in power. The end-game to the populist ploy could bring down the rest of Europe.

If the latter option is taken, the Syriza government would fall anyway. There will be greater hardship for ordinary Greeks if Syriza carries out its threat to return to the old currency.

From the start, Syriza defied reality by promising voters it could end austerity and yet get new financing. That simply will not happen.