Losing the narrative in Greece

Recently I told a few friends how frustrating the events unfolding in Greece are. It’s clear to most that the delays to a full restructuring in Greece reduces the net present value available to creditors. Yet, for political reasons, delay seems to be the only way forward. Meanwhile we have to watch as the spectacle unfolds with increasing acrimony that makes clear how the euro has become a source of division rather than unity.

The question is: what’s the right narrative here? And I think Michael Pettis puts it into perspective when he says the basic question is “When do we decide that Europe must restructure much of its debt?” His answer to that question is the source of my frustration because the way he puts it, the longer we delay, the worse the outcome is likely to be. I wholeheartedly recommend his post and want to stress these particular parts – and notice that how he begins his long essay expressing the same frustration I have:

“It is hard to watch the Greek drama unfold without a sense of foreboding. If it is possible for the Greek economy partially to revive in spite of its tremendous debt burden, with a lot of hard work and even more good luck we can posit scenarios that don’t involve a painful social and political breakdown, but I am pretty convinced that the Greek balance sheet itself makes growth all but impossible for many more years.

[…]

But I suspect that many European policymakers incorrectly think Syriza is as radical as it gets, and once Syriza is discredited, almost any alternative leadership would be better. I disagree. If Syriza is discredited, and the Greek economy continues to stagnate as I expect, the alternative could very easily be Golden Dawn or some other group of radical nationalists determined to blame foreigners for their problems, and Germany will have set itself up for much of the blame. It is ironic, because in my opinion Angela Merkel is not and has never been the bully that she is made out to be, and the main reason Germany seems to be running the show is that no one else has ever dared to disagree with her or to take any position of real leadership. For that reason she and Germany are being seen as far worse than they actually are.

[…]

…A debt crisis must be resolved quickly because there is a self-reinforcing component within the process that can be extraordinarily harmful. High levels of sovereign debt create uncertainty about how the costs of resolving the debt will ultimately be assigned. This uncertainty causes growth to slow by adversely changing the behavior of a wide variety of stakeholders in the economy (as I will describe later). As the economy slows, contingent liabilities within the banking system rise, tax revenues decline and fiscal expenditures rise, all of which push up sovereign debt levels even further and increase both the cost of resolving the debt and the uncertainty about how the costs will be assigned. The consequence of this self-reinforcing deterioration in the sovereign balance sheet is, at first, a slow grinding away of the economy until the market reaches some point, after which the process accelerates and debt can spiral out of control.

But long before things spiral out of control, when debt levels are excessive — and debt levels are excessive as soon as there is wide-spread uncertainty about the amount of the costs and the sectors to whom they are going to be assigned — the economy is being damaged and, with it, political, economic and social institutions are being degraded. With very high levels of debt the decision Europeans face is whether to move quickly to reduce uncertainty and assign the losses to sectors best able to absorb the losses, and in ways that maximize future value creation, or to allow these losses to be assigned implicitly, over many years, and in ways that are hard to control.

This is the heart of the matter. The point of a debt restructuring is to eliminate or reduce the uncertainty associated with the resolution of the debt so that the total value of the debt increases and future growth is not constrained.

This is as complete a description of the economic and political situation of a debt restructuring as you will find. And I think what Michael is outlining here is something that is important for all debt restructurings whether it be a country or a company. The difference is that there is a well-defined process for corporate restructuring that reduces politics as an impediment to positive outcomes. With Greece, the politics are dominating the narrative.

For example, my frustration came from the following story that Ekathimerini was running yesterday:

Justice Minister Nikos Paraskevopoulos has said he is ready to sign an older court ruling that will enable the foreclosure of German assets in Greece in order to compensate the relatives of victims of Nazi crimes during the Second World War.

Greece’s Supreme Court ruled in favor of Distomo survivors in 2000, but the decision has not been enforced.

Distomo, a small village in central Greece, lost 218 lives in a Nazi massacre in 1944.

“The law states that in order to implement the ruling of the Supreme Court, the minister of justice has to order it. I believe this permission should be given and I’m ready to give it, notwithstanding any obstacles,” Paraskevopoulos told Antenna TV on Wednesday.

“There must probably be some negotiation with Germany,” said Paraskevopoulos, who first announced his intention Tuesday during a Parliament debate on the creation of a committee to seek war reparations, the repayment of a forced loan and the return of antiquities.

During the same debate, Prime Minister Alexis Tsipras expressed his government’s firm intention to seek war reparations from Germany, noting that Athens would show sensitivity that it hoped to see reciprocated from Berlin.

I know people have long memories about injustices in the past. In the U.S>, people talk about reparations for slavery. But we are in the middle of a bailout negotiation where Greece most certainly is not in the driver’s seat. And trust has been a key watchword all throughout. In what parallel universe does this kind of thing actually make those negotiations better? In whose political strategy does bringing up World War 2 reparations at this specific point in time lead to a better long-term outcome for Greece?

We are losing the narrative.

I don’t see the Greek situation in a positive light, frankly. The politics around it are increasingly toxic and that will lead to sub-optimal economic outcomes. I continue to believe that a likely outcome now is a Greek default. And then the question is: when and under what circumstances? Grexit is not a foregone conclusion in this scenario. But the reparations talk makes it more likely that the Institutions formerly known as the Troika will use Greece as a whipping boy, an example of what happens if one does not toe the line. I wish I had something positive to add but nothing positive is happening regarding Greece right now.