Europe waits to get measure of Tsipras before debt deal

The political pyrotechnics in Athens are viewed with no little disquiet elsewhere in the euro zone and financial markets. The sense grows that yet another moment of truth looms for Greece and the euro zone.

Since his election on Sunday, radical- left prime minister Alexis Tsipras has done exactly what he said he would do, with demands for a big write-down of the Greek national debt and the reversal of swingeing budget cuts.

In defiance of expectations that he would adopt a pragmatic stance upon taking power, Tsipras chose a right-wing coalition partner that shares his rejectionist view of the relentless fiscal retrenchment undertaken since the outbreak of the crisis in 2009.

Far from it. On the day he assumed office, Tsipras went to a memorial for Greek resistance fighters killed in 1944 by Nazis. This was seen as an implicit portent of a hardline push by Tsipras against Germany’s hardline stance on his claim for a debt haircut.

Extraordinary overture

The next day Tsipras objected to new European sanctions against Russia over the turmoil in Ukraine, an extraordinary overture seen in some capitals as an attempt to cast a geopolitical dimension on the country’s fiscal woes.

The day after that his government appeared to call an abrupt halt to a privatisation plan in place since the second EU- IMF rescue programme for the country in 2012. The shares of Greek banks received a drubbing on the stock market.

All of this points to acute tension when the Tsipras administration enters the negotiation chamber. As the Syriza leader marched ahead in pre-election polls, euro zone observers said the optimal outcome would be for Tsipras to fall short of an overall majority. This was seen as an opening for the premier to moderate some of his debt-cutting demands in anticipation of a compromise centred on longer loan maturities and an interest rate cut.

It hasn’t really worked out that way thus far – and serious questions are now being raised as to whether Tsipras will go for broke when talks begin.

In one reading, the rhetorical games under way since Monday can be explained away as the shadow-boxing preamble to the main event

. In another, a disorganised administration has yet to settle on its strategy. That increases potential for disruption. As bank shares tanked, Tsipras’s deputy, Giannis Dragassakis, blamed ministers’ claims about the privatisation plan and the restoration of the minimum wage on inexperience.

There is no dismissal of Tsipras’s mandate in euro zone circles. The same goes for the long succession of bruising fiscal cuts undertaken by his two predecessors and the resultant hardship imposed on the Greek people. But even if observers in the official world accept the country’s sky-high debt is too high, a haircut on the principal amount due is still seen as a step too far. While the mooted “reprofiling” of the debt opens the prospect of big savings on a net present value basis, it remains unclear whether such a compromise would be enough for Tsipras.

That might be the best he could get, together with the possibility of a modest uplift in expenditure as debt costs decline.

All of this comes amid ructions in Germany over the new stimulus plan from the European Central Bank, which considerably narrows scope for chancellor Angela Merkel to manoeuvre on the debts of Greece. Indeed, Tsipras’s nod to Moscow this week was seen in some quarters as an indirect attempt to draw pressure on Merkel from Barack Obama. Unlike Berlin however, Washington has no taxpayers’ money on the table.

Prickly question

After big losses were imposed on private investors in 2012, most of the Greek public debt is now held by euro zone countries. This raises the rather prickly question of taxpayers elsewhere in Europe bearing losses to accommodate crisis expenditure by Greece, whose record of collecting taxes from its people is not entirely stellar.

Then there is the uncertain political outlook for Spain. A major concession to Tsipras would hand the next general election to the insurgent Podemos party, whose agenda is similar to Syriza’s. The concern remains that any doubt cast over Spanish debt – which, unlike the debts of Greece, is largely in private hands – could plunge the euro zone into more turmoil.

An overarching solution seems as far away as ever. A fiscal salve is in play for Tsipras. Europe wants the measure of him before discussing anything more radical.