Just back from Athens, I feel almost compelled to shout it from the rooftops: it’s not about the debt. it’s about the economy, stupid – to borrow a phrase from Bill Clinton. In Athens, much of the discussions I had revolved around the debt: how much will Europe cut the burden now that Greek voters have asked for it? Or: wouldn’t it be cheaper for Europe to write off half its claims on Greece than to risk losing it all?

The new Greek government and its voters are in for a reality shock. The debate in Athens seems to suffer from four delusions.

Delusion 1: It’s about the debt, not the economy
Yes, Greek public debt is very high with 176% of GDP. But Europe and the IMF have already seen to it that the debt is bearable with low interest rates, long maturities and generous grace periods. The European promise remains: if Greece stays the course of supply-side reforms, the debt service will not suffocate Greece. In return for reforms, Europe can and will offer even lower interest rates and longer maturities. Asking for a cut in the nominal debt is pointless.

For the sake of argument, assume that the creditors were to write off half the Greek debt and return Greece to full capital market funding thereafter. On its remaining debt of 88% of GDP, a post-default Greece not eligible for ECB purchases and pursuing Syriza-style policies might soon have to pay more interest than the 4% of GDP Greece actually paid on its debt in 2014. Bad deal.

The massive Greek debt is mostly the result of deep-rooted structural problems such as an overstaffed and inefficient public service, an overregulated private sector and an inflexible labour market. If Greece is a bad place to invest and create jobs and if its bureaucracy and tax system scare away businesses, Greece cannot get the sustained growth and tax revenues it needs. If Syriza indeed reverses many of the useful if incomplete labour market and public sector reforms of the Samaras government and stops privatisations, it is difficult to see how creditors could ever agree to lend more money to a borrower who is destroying his potential to grow and service his debt. A large-scale reversal of pro-growth reforms is a much bigger breach of Greece’s obligations to its creditors than a modest fiscal overshoot. It’s about creating a competitive economy for the long run, not the debt or a fiscal number for one year.

Delusion 2: It’s all about Greece
Greece matters. Europe would love to keep Greece in the euro and on the path to growth. Europe is happy to fund the process, but only if Greece keeps laying the foundations for sustained growth. Tough love means that help is conditional.

Remember the bigger picture: in the early 1980s, Thatcher reformed the labour market and other sclerotic institutions in Britain. In the early 1990s, Scandinavian countries overhauled their welfare systems. In 2003-2005, Germany cured its structural malaise through labour-market and welfare reforms. It was tough and unpopular at the time, but it worked.

The grand European project now is to keep Spain, Portugal and Greece on the reform track while nudging big Italy and France to follow suit. This is how Europe as a whole can become as competitive in a globalised world as Sweden, Switzerland, Germany and Slovakia already are today, to name just a few. Seen from Brussels and Frankfurt, from Berlin, The Hague and Tallinn, this is about Madrid, Rome and Paris much more than about Athens. Funding lunacies such as reregulating the Greek labour market, creating a bad precedent and rewarding a populist who reneges on his country’s obligations and makes it less rather than more competitive is not part of the plan.

That the German ultra-left (Die Linke) is applauding Syriza’s every move is as telling as it gets: after all, they are the legal successors to the communist party that had built the wall and driven East Germany into the ground until it collapsed. Not a good company to keep.

Delusion 3: Ignore the IMF, outvote Berlin, send the troika packing
Greece would like to “negotiate” with Europe about the debt, seeking allies to outvote the pesky creditor countries. Well, try to “outvote” your bank next time you ask for a new loan while threatening to default on your old mortgage. Good luck.

Europe has time and money, a Greece mired in uncertainty has little of either. Nothing can happen, not even a simple extension of the end-February deadline for the pending troika review of Greek progress, unless the parliaments of creditor countries agree. Reform reversals and schmoozing up with other populists such as Spain’s Podemos won’t exactly help.

The IMF has its serious flaws. It did insist far too much on short-term austerity rather than long-term structural reforms initially. But that is history. It is hard to believe that the parliaments of creditor countries would grant Greece any new loan unless the IMF as part of the full troika has certified beforehand that Greece is on the right track. And could Greece really boot out the troika, of which the ECB is part, and still expect the ECB to continue preventing a potential collapse of the Greek banking system through emergency liquidity assistance for long? Love it or hate it, Greece has to deal with the only willing lenders it has.

Delusion 4: Southern comfort
According to its new finance minister Varoufakis, Greece wants to work with Italy, Spain and Ireland on a new growth strategy for Europe. Making some comments against “austerity” may be easy. But would the governments in Spain and Italy really want to support Tsipras, only to encourage their own populist opponents at home who have thrown in their lot with Syriza? And being able to fund themselves at record low market rates, would Spain and Italy want to send their spreads over Germany soaring by joining a debate on debt write-offs? Not very likely.

My best bet remains that, facing reality, prime minister Tsipras will eventually get real. A patient Europe will offer face-saving compromises. As a wily and power-conscious operator, Tsipras could still do a Lula-style U-turn instead of ending up in history books as the prime minister who broke his country.

But it could be a close call. And it could well be a rough ride for Greece first before Syriza bows to reality. If worst came to worst in Athens, and I still believe it won’t come to that, Europe would rather cut its losses than fund the perennial basket case into which an overdose of populist policies could turn Greece. The risk of accidental Grexit is real. We put it at 35%, well below par but still serious. Fortunately, Europe would have the defences it needs to contain the potential financial and economic contagion. The real issue to watch in Euope is the risk of political contagion. Will the likely clash between Syriza and reality deflate the allure of populists in Rome, Madrid and Paris or stoke the populist anger against the indignities of real llife? We bet that reason will prevail despite the occasional hiccup.

Holger Schmieding
+44 20 3207 7889


  1. I am greek and i am some of a few that agree with you but unfortunately the turn of Greece and the wiliness of Greek ppl for no austerity is irreversible. There is no more bluffs no more drama from this gov, debt cut or drachma.

    i hope that this will change somehow let’s hope for the best for future of Europe.

  2. The problem with economists is that they ‘in numbers’ not in human terms.

    Delusion 1: You say the debt is sustainable. It is not for the people of Greece, who are unemployed, penniless and losing their home. Removing the debt means investing back into the economy, creating jobs and the breaks people need to get back on their feet. More austerity is not the way to do that. If the debt is only sustainable by people losing their homes and going hungry, then that debt is not sustainable.

    Yes, the Greek problem is as a result of an inefficient, over populated public sector, over regulation of the private sector (especially when it disincentivises small business), but the Greeks need to realise and deal with that on their own terms, not through enforced austerity. Frankly, default is the only way Greece can be forced to deal with these issues.

    Delusilon 2: Tough love works both ways. Greece isn’t a customer or a citizen. It’s a country. And, as one of the most despised leaders in modern history, Thatcher isn’t the best example to be using here.

    Delusion 3. The IMF may be a bank, but this isn’t a ‘mortgage’. Greece isn’t buying a house. It took out a loan that it shouldn’t have been given. It’s bank knew the risks and ignored them. There is no collateral to take back.

    Delusion 4: When the ‘anti-austerity’ parties in Italy, Spain and Ireland see the inevitable breaks Greece gets in its negotiations, public opinion will be bolstered. Upcoming elections will see more of the anti-austerity brigade in seats of power willing to learn from Syriza’s ‘successes’.

    I agree with my Greek friend who posted earlier. I’m Irish but lived in Greece for several years. I know the Greek people. There will be no bluff. There will be concessions or there will be defaults. The short term pain of default consequences (see Iceland) will be much preferred to the Greek people than decades of austerity and pain.

  3. Ahem… “But Europe and the IMF have already seen to it that the debt is bearable with low interest rates, long maturities and generous grace periods.”???
    Where on earth are you getting your facts from?! “bearable”?! “low interest rates”??! You must be joking… I won’t even bother reading the rest of the article. Get your facts right, then speak. How is three times the interest rate of any other country borrowing “low”? Give me a break.

  4. Sure, Greece needs growth, but the austerity was so fast and hard that it has reduced people to rock bottom — where is the consumer spending, for example, going to come from? The other thing that has happened, very much overlooked, is that very many young Greeks have taken advantage of their single market rights and responded to the collapsing Greek economy by buggering off elsewhere — going to other EU countries and beyond to find work and set up businesses. This outflow of talent caused by the extent in austerity in Greece further undermines growth prospects.

    So I’m not sure Syriza is wrong. The fundamental thing to do now is send a message on the debt and in effect get that out the way so a stronger foundation for growth is in place.

    And there are worse possibilities than Grexit… I wouldn’t have thought it was very wise of Tsipras to give the defense ministry to far-right Panos Kammenos…

  5. Dear “ms”, you probably need to get your facts straight too. The European Countries all together lend Greece money with a low rate, which they in turn borrow from the markets. Each country has a different rate, so for some it’s higher (which means they basically sponsor Greece, and that’s usually the weakest countries), and for some it’s lower (which indeed means they gain in the long term). Writing off some of the debt needs to be approved by all 27 EU Parliaments. So that’s not something you hear in the Greek news, is it? I know, I’m in Greece too, and I can understand that each party hides the whole truth, and only sticks to the part of the truth that suits them. Most of the Greek people/voters are mislead, one way or the other. If you first understand that, your eyes will open wider.

    First of all, consider how unethical to the weakest EU-countries it will be for Greece to demand a 50% write-off. They borrowed loans in order to help us stand on our feet, and now we want to make them pay for it. So it’s not just Germany there, which I know you’re taught to hate these days, but there’s 26 more countries.

    On the other side, dear author, although I’m not personally happy with the result of the elections, I don’t think it was a surprise. Basically, there were two basic options to choose from:

    1) vote for the corrupted government who all they do is increase taxes, while leaving their “allied” big-money-friends and themselves untouched. The coalition government (both parties) who brought us here in the first place, and have shown no sign of willingness to change all the wrong things, who only vote for (some) reforms and never put them in practice. The people have suffocated, but mostly, they see how unfair it is for them to pay for all of this. People got really fed up with them, and it’s really incredible how they turned their back to the coalition government, letting it lose to the nuts of Syriza, even after all the horror that was spread about defaulting… Yes, that’s really an achievement of the coalition government! And shows how big they failed.

    2) Vote for the nuts of Syriza.. They promise the earth to the people, obviously leaving a big question mark about how they can do it. One thing you should know is that most Greeks are very arrogant (we feel we’re the center of the Earth), and don’t like being told what to do. It’s always the others to blame, right? So the voters (36% of them) believe that Syriza will go and shake EU, that they will extort them. Obviously that’s no ground for good relations, so it’s a wonder how people believe they can extort Europe, make them have losses and then be friends again. Anyway, people voted for them cos they were told they will go back to their previous standards… Poor us. It’s true that Syriza probably has no connections with the corruption that ruled the country all these years, and starts from a clean state, so it’s nice to hear that many of the corrupted people will finally lose connections with the government and pay back some of what the previous corrupted governments were hiding. Justice is one of the things that suffered the most during all the past years, and people couldn’t take it anymore.
    On the other hand, unfortunately, Syriza will destroy the economy, because of their nuts mindset. Left politics apply in countries where people are ethical and do the right thing because they believe in it and they can tell the difference between right and wrong. Not in countries where you’re taking advantage of every single opportunity you’re given to hide income and avoid paying your taxes. It’s a clear problem and lack of social education (not that we were born this way, our corrupted country made us this way – it’s all a vicious circle really). Economy will be destroyed because leftist mentality doesn’t promote evaluation, because obviously that will create levels between very good and bad employees. But they want to have a big public sector at the same time, who have no real motive to be productive.. Go figure.. They wil increase taxes to the rich people and companies, but they forget that this will drive them away, which means loss of jobs and loss of taxes. We’ve seen this before, but do they really care? Big money-making companies are the enemy to them, so? As if tax money and jobs fall from the sky.

    Anyway.. So you see what options were available in these elections? Corruption vs leftist nuisance. The leftist nuisance won, because people couldn’t stand corruption any more, and because they were promised hope. Regardless how realistic it is.

    That’s all folks, and apologies for the long message!

  6. Sorry to copy-paste the article from Forbes, but it really covers my answer to your article:

    “Greece’s Net Debt Is 18% of GDP, Not 175%. What’s Germany’s?”

    Before imposing another round of austerity on Greece, Germany should fix its own accounting problem — by calculating Greek debt, and its own, with accepted international standards.

    As Greek citizens head to the polls this Sunday, German officials have not missed the chance to remind Greece that it must fulfill its debt obligations. This means adhering to an unprecedented austerity which has depressed the Greek economy.

    The trouble is that Germany has been overestimating Greece’s debt by failing to follow the International Public Sector Accounting Standards (Ipsas),which measure liabilities and assets over time.

    Ipsas standards are similar to those used by leading governments, businesses, banks and investors at all levels, according to Professor Jacob Soll. “In fact, the debt has been calculated to be larger than it actually is, or would be if one used Ipsas,”writes Soll in a recent New York Times op-ed.

    Just how much is Greek debt overestimated?

    The answer is to be found in If you apply Ipsas to calculate Greek debt, the Net Debt is 18%, not 175% of GDP.

    What about Germany’s Net Debt under Ipsas? 46% of GDP.

    That means that Greece’s debt situation is better than that of Germany’s!

    So why doesn’t Germany use Ipsas to calculate the Greek debt? For two reasons, according Professor Soll. First, they don’t apply Ipsas in their own House.“A little-known fact is that the Germans also do not use Ipsas and have notably opaque public finance standards,” he writes.

    Second, by steering away from Ipsas, Germany can keep Greece on the leash while conveniently keeping Greek debt off its own books.

    “One reason might be that the Germans have refused to price the debt fairly, or properly report its value, which means in the short run that they extract more austerity from the Greeks than they should, and that they also keep this loan off the budget balance sheets because it would come up as a loss under any legitimate accounting standard,” writes Soll.

    In our opinion, there’s a third reason. Overestimating sovereign debt for Southern European countries stirs anxiety in foreign currency markets, depressing the Euro, and firing up Germany’s export engine.

  7. The level of sovereign debt is irrelevant when there are no maturities and when the interest rate is zero. That’s also called equity and no one can complain about equity. Greece presently allocates 2,5% of its GDP to debt service (that is net after ECB interest rebates; before those rebates, the gross debt service is 4,5%). With some tough negotiation, Greece could probably reduce the net debt service to about 1% (not to zero % because the debt owed to private creditors cannot be renegotiated at this time) with a 20-year grace period for interest. And the maturities could be extended to 50 years or more.

    Given that, Greece would have to allocate virtually nothing of its GDP to debt service for the next 20 years. All this heated discussion about the unsustainability of Greece’s debt is a soap opera, and a damaging one. Sovereign debt is by far not Greece’s greatest financial problem; 70 BEUR non-performers at Greek banks, 75 BEUR of past-due taxes and billions of government arrears are the real financial problem. And the real problem of Greece is that the domestic economic value creation by far does not justify the living standard which Greeks desire. The debt is always the “derivative”; the “underlying” is the real economy. To think that one can solve the problem of the “underlying” by playing around with the “derivative” is simply naïve.

    Consider this: if all of Greece’s debt over 60% of GDP were forgiven with the only proviso that the remaining debt (the 60%) would have to be raised in the market at market rates, then the debt service would be GREATER than it is now with 320 BEUR of debt. This is assuming a 3% market rate. If the market rate were 5%, Greece’s 60% Greece would really have to implement some austerity!

  8. Look, it can be summarized as follows: Its the primary surplus, stupid. The Greeks know they are not going to get their beloved haircut. How much relief is wise and how much structural reform to be required….well that’s the question, but clearly they must be linked. But is Europe going to sit back and let SYRIZA roll back reforms in place without penalty? That is the best evidence you can ask for that a haircut or other large debt relief projects might well be a waste of European taxpayers money. Check this out from some friends in Athens:

  9. There is a simple test for all those Syriza supporters. If someone borrows from you and then does not pay it back will you lend to them again? Think about it. If you still say yes please lend to me. I will teach you a lesson.

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