Greek debt: growing acknowledgment that it is simply unsustainable and some accommodation will be necessary

Approach has much to commend it and deserves a hearing in EU capitals


The whistlestop tour of European capitals by Greece’s new leaders is finding doors if not wide open, at least ajar. The mood music is still that Greece must honour its debts, that forgiveness is out, but a subtheme is emerging – an acknowledgment that the debt is simply unsustainable and that some accommodation will be necessary. Michel Sapin, France’s socialist finance minister, who met his Greek counterpart on Sunday insisted Greece would have to pay off its debt in full, but spoke of “new contract” for Greece.

On Monday Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis laid out their stall – they would repay all the €315 billion old debt, but want to transform it into growth-linked bonds that would pay their way only as the economy recovered; they would run an operational surplus of some 1-1.5 per cent, albeit in breach of their troika commitments; and would launch a drive against tax evasion by the wealthy which has done so much to cripple state revenues.

The approach has much to commend it, and deserves a hearing in EU capitals. The rescheduling of debt through bond issues would have the same effect as partial debt forgiveness, but is qualitatively different politically – German and Finnish parliamentarians can be told the Greeks are honouring their debt. And the link to growth would ensure the debt repayments were not contributing any more to the downward spiral of austerity.

Although Syriza has already reversed some elements of its predecessor’s troika-mandated austerity programme, not least in rehiring of 12,000 civil servants, there is a strong case that despite its inexperience it is better placed to see through main elements of the sort of structural reforms creditors will require. It does not have the ties to the oligarchs and bankers whose dead hand has in the past held back reform. Who better to prepare banking recapitalisation and restructuring? Who better to shake up the sclerotic tax system?

But there’s many a slip between cup and lip. France and Germany are deeply unhappy with Tsipras talk of repudiating the second bail-out and its conditions . They say that Greece, although not legally bound to complete the second bailout, would risk bankruptcy through its repudiation. Erkki Liikanen, Finland’s central bank chief, has warned that the ECB would be forced to cut off lending for its banks if the government left the bail-out. On Tuesday three banks tapped ECB emergency liquidity funding.Time is running out.

France’s finance minister has warned Athens against trying to play Paris off against Berlin. But the latter is already concerned at what Le Monde has called an emerging “social democratic front” of EU states both willing to be more accommodating to Greece and pushing a growth agenda in the EU. Germany, and Ireland, have an interest in remaining in step in a debate as much about the future direction of the union as about Greece.