Why Greek default looms

Euro towels in Greece Image copyright Getty Images

I have used the metaphor before of Greece and Germany being a feuding married couple, not really wanting a divorce but so unable ever to understand the other's point of view that terminal rupture remains a significant probability.

So for the Greek prime minister, Alexis Tsipras, it must have been personally humiliating to send his "please-send-cash-soon" letter to Angela Merkel, the German chancellor (the letter has been obtained by the FT).

He complains that there is no sign, in the conduct of eurozone officials working on the new financial rescue plan, of wanting to make the promised new start in the fraught relationship.

Mr Tsipras accuses them of trying to hold the country to a reform and reconstruction programme that his Syriza government has rejected, and which he thought had been dropped, too, by eurozone leaders.

Which broadly points to the biggest flaw in the entente reached in February between Greece and eurozone - namely that the agreement they approved disguised a continuing and profound emotional and ideological gulf.

Both sides in essence want the other to admit they were wrong in the past and have turned over a new leaf: neither shows the inclination to do that.

The clearest manifestation of mutual misunderstanding being a long way off was last week's blog by the finance minister, Yanis Varoufakis.

He makes a point that is both true and incendiary (in the present circumstances): namely that the eurozone's and IMF's original 240bn euro bailout was, in practice, a bailout of the feckless banks and investors who had lent to Greece, rather than of Greece itself.

This from Mr Varoufakis's blog says it all about why the current negotiations between the Greek government and its eurozone creditors are going so badly:

"I opposed the 2010 and 2012 'bailout' loans from German and other European taxpayers because:

  • the new loans represented not a bailout for Greece but a cynical transfer of losses from the books of the private banks to the weak shoulders of the weakest of Greek citizens. (How many of Europe's taxpayers, who footed these loans, know that more than 90% of the €240 billion borrowed by Greece went to financial institutions, not to the Greek state or its citizens?)
  • it was obvious that, at a time Greece could not repay its existing loans, the austerity conditions for giving Greece the new loans would crush Greek nominal incomes, making our debt even less sustainable
  • the 'bailout' burden would, sooner or later, weigh down German and other European taxpayers once the weaker Greeks buckled under their mountainous debts (as moneyed Greeks had already shifted their deposits to Frankfurt, London etc.)
  • misleading peoples and Parliaments by presenting a bank bailout as an act of 'solidarity to Greece' would turn Germans against Greeks, Greeks against Germans and, eventually, Europe against itself."

There is a high probability, most economists would say, of history vindicating Mr Varoufakis's critique: the punishment of Greek people for the feckless borrowing of their government and the feckless lending of German banks has surely gone well beyond what is necessary to instruct Greece in the merits of fiscal rectitude.

But whether it is altogether wise and diplomatic to tell the Germans they were selfish and wrong, at this juncture, is moot.

There is no sign of the two sides forgiving each other and moving on.

Which brings us to probably the most important part of Mr Tsipras's letter - which confirms that the refusal of the European Central Bank to lift constraints on its funding for Greek banks and on their ability to provide short term loans to Athens means he is about to run out of money.

Unless the ECB lightens up and takes Greek banks off the leash, or the eurozone accelerates plans to provide additional loans, it will become impossible for Athens "to service its debt obligations".

Mr Tsipras makes it clear that if presented with a choice between failing to pay international creditors, including the IMF, and paying them but not Greek public servants, he will choose the first category of default.

Which would not be the same as leaving the eurozone, but Grexit would not be more than half a hop away - because default on the sovereign debts would represent abject failure of attempts to revive the Greek economy from inside the currency union.