Greece has been plunged into five years of recession, and its debt-to-GDP ratio has continued to rise, from 120% of GDP, to 175%. Photograph: Dado Ruvic/Reuters
It’s the kind of hand-to-mouth decision many families whose finances are tight have to make regularly: how to meet the monthly mortgage repayment. But most people know that using their credit card, which invariably carries a far higher interest rate, is not a sensible answer.
Yet Yanis Varoufakis. the Greek finance minister, told a BBC interview on Sunday that’s exactly what his government is being urged to do. And, in a sense, he’s right.
The deal that Greece was being offered by its troika of creditors last week might have helped it to honour the €1.6bn (£1.1bn) repayment it is due to make to the International Monetary Fund on Tuesday, but it would leave the country’s economic crisis unresolved.
And that has been the problem ever since Greece was first bailed out in 2010 Its creditors have been unable to concede that what the country faced was not a temporary cash-flow problem – caused by the shortage of credit in global markets – but a solvency crisis: the country was bust.
The solution, often characterised as a rescue, or a bailout, was in a sense an outsized payday loan, from the IMF, the European Central Bank and the European Commission – albeit with serious, detailed conditions attached.
Greece took out a costly loan from the troika to pay back the banks and investors who had lent to the country in the run-up to 2008. The second bailout, in 2012, did involve some debt write-offs for bondholders; but not enough to make its finances manageable.
There were three reasons it was impossible to admit that Greece was effectively bankrupt: first, the european single currency – meant to be an indissoluble financial union – had no provisions for countries becoming insolvent. No member was meant to bail another out. Moreover, the strict tax and spending rules imposed on members – known as the stability and growth pact – were meant to prevent countries getting into trouble anyway.
Secondly, the IMF, which the Europeans brought in to underpin the massive loan package and act as a lightning conductor for
political dissent about the stringent conditions is not meant to lend to countries that are insolvent.
Instead, it is meant to tide governments over temporary hard times and help them to rebuild their economies — in many cases, with the help of a devaluation in the country’s currency, something Greece is unable to achieve within the single currency.
A third reason it was impossible to admit that Greece was bust was in some ways a more optimistic one: the troika believed that its reform recipe – spending cuts, tax increases, labour market liberalisation – would restore the Greek economy to growth and help make its debts sustainable.
Instead, the country has been plunged into five years of recession, and its debt-to-GDP ratio has continued to rise, from 120% of GDP, to 175%.
The radical Syriza government was elected precisely because Greek voters could see the heavy price exacted in exchange for the “rescue” they had been offered – much of which went straight back out of the door to repay the private sector creditors that had lent recklessly to Athens in the first place.
Even the IMF appeared to have decided that debt forgiveness must be part of any new package offered to Greece; Christine Lagarde was widely reported to have made debt restructuring a condition of its participation in a new deal.
And Varoufakis and his prime minister, Alexis Tsipras. decided they wouldn’t accept just another payday loan, postponing the moment of reckoning for another few months.
Many of the poor American families who emerged from the credit crisis with impossible-to-pay mortgages received a debt write-off, with their irresponsible lenders bearing the cost. And in the UK more recently, payday lender Wonga was forced to write off a swath of loans that had been made to borrowers without the means to pay.
It remains to be seen what the Greek population will decide about the offer the country’s creditors made last week. But Varoufakis’s position is that it won’t help his country to take another short-term bailout — and be back around the negotiating table in six months’ time. As he put it in his interview on Sunday, “I submit to you, Sir, that that would be a very silly thing to do.”
Category: Payday loans