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Anatole Kaletsky: Why Syriza Will Blink

LONDON Once again, Greece seems to have slipped the financial noose. By drawing on itsholdings in an International Monetary Fund reserve account, it was able to repay 750 million($851 million) ironically to the IMF itself just as the payment was falling due.

This brinkmanship is no accident. Since coming to power in January, the Greek government, ledby Prime Minister Alexis Tsipras's Syriza party, has believed that the threat of default and thusof a financial crisis that might break up the euro provides negotiating leverage to offsetGreece's lack of economic and political power. Months later, Tsipras and his finance minister,Yanis Varoufakis, an academic expert in game theory, still seem committed to this view, despitethe lack of any evidence to support it.

But their calculation is based on a false premise. Tsipras and Varoufakis assume that a defaultwould force Europe to choose between just two alternatives: expel Greece from the eurozone oroffer it unconditional debt relief. But the European authorities have a third option in the event ofa Greek default. Instead of forcing a "Grexit," the EU could trap Greece inside the eurozone andstarve it of money, then simply sit back and watch the Tsipras government's domestic politicalsupport collapse.

Such a siege strategy waiting for Greece to run out of the money it needs to maintain thenormal functions of government now looks like the EU's most promising technique to breakGreek resistance. It is likely to work because the Greek government finds it increasingly difficultto scrape together enough money to pay wages and pensions at the end of each month.

To do so, Varoufakis has been resorting to increasingly desperate measures, such as seizingthe cash in municipal and hospital bank accounts. The implication is that tax collections havebeen so badly hit by the economic chaos since January's election that government revenuesare no longer sufficient to cover day-to-day costs. If this is true nobody can say for surebecause of the unreliability of Greek financial statistics (another of the EU authorities'complaints) the Greek government's negotiating strategy is doomed.

The Tsipras-Varoufakis strategy assumed that Greece could credibly threaten to default,because the government, if forced to follow through, would still have more than enough moneyto pay for wages, pensions, and public services. That was a reasonable assumption back inJanuary. The government had budgeted for a large primary surplus (which excludes interestpayments), which was projected at 4% of GDP.

If Greece had defaulted in January, this primary surplus could (in theory) have been redirectedfrom interest payments to finance the higher wages, pensions, and public spending that Syrizahad promised in its election campaign. Given this possibility, Varoufakis may have believed thathe was making other EU finance ministers a generous offer by proposing to cut the primarysurplus from 4% to 1% of GDP, rather than all the way to zero. If the EU refused, his impliedthreat was simply to stop paying interest and make the entire primary surplus available for extrapublic spending.

But what if the primary surplus the Greek government's trump card in its confrontationalnegotiating strategy has now disappeared? In that case, the threat of default is no longercredible. With the primary surplus gone, a default would no longer permit Tsipras to fulfillSyriza's campaign promises; on the contrary, it would imply even bigger cutbacks in wages,pensions, and public spending than the "troika" the European Commission, the EuropeanCentral Bank, and the IMF is now demanding.

For the EU authorities, by contrast, a Greek default would now be much less problematic thanpreviously assumed. They no longer need to deter a default by threatening Greece withexpulsion from the euro. Instead, the EU can now rely on the Greek government itself to punishits people by failing to pay wages and pensions and honor bank guarantees.

Tsipras and Varoufakis should have seen this coming, because the same thing happened twoyears ago, when Cyprus, in the throes of a banking crisis, attempted to defy the EU. The Cyprusexperience suggests that, with the credibility of the government's default threat in tatters, the EUis likely to force Greece to stay in the euro and put it through an American-style municipalbankruptcy, like that of Detroit.

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The legal and political mechanisms for treating Greece like a municipal bankruptcy are clear.The European treaties state unequivocally that euro membership is irreversible unless a countrydecides to exit not just from the single currency but from the entire EU. That is also the politicalmessage that EU governments want to instill in their own citizens and financial investors.

If Greece defaults, the EU will be legally justified and politically motivated to insist that the euro

Anatole Kaletsky: Why Syriza Will Blink - Real Daily Buzz http://www.realdailybuzz.com/rdb.nsf/DocView?Open&UN...

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