Whats the deal with Greece : Yanis Varoufakis’s potential toolbox

Alexis Tsipras the new PM has taken a hard-line on the Troika and Yanis recently threw the Troika into the fire by refusing to negotiate.  While the current deal means the level of interest Greece have to repay on their debt is 2% not far above Germany’s level of debt financing and far lower than the market rates would be,  they need room to grow without creditors demanding money they have not got. The risk of contingency if a deal is not struck in Greece to countries such as Portugal, Spain and Italy have not been missed by Merkel. The growing despair at Europe or at austerity have been and risks further being blurred as austerity has not delivered for people and does not look set to. There is over 25% unemployment in Greece which gets worse still for young people with 50% looking for work they cannot find. There has also been a prolonged spike in suicide rates of around 35% so it is no wonder people have turned to Syriza and taking a hard-line.

As negotiations over Greece’s debt pile and the Troika’s apparently immovable stance on the conditions of the bailout agreement agreed by the last administration. Yanis Varoufakis the new Greek finance minister has brought his plan, I have not seen this plan and I am not saying if any of these tools will or will not be in the plan, or that any of these are going to happen but here are few ideas of what might conceivably happen.

Let’s look at what might be included in Yanis’s toolbox:

 

Debt restructuring and or an Interest holiday:

Debt restructuring often in the form of moving short term debts to long term debt either through re-financing or through prolonging the contract on debt obligations is one way in which all debts could be re-paid. This would allow Greece to focus on its problems domestically now and allow the space in the budget to spend more getting the economy growing and meet its election promises.

This movement away from the shorter bonds such as the shorter T-bills and extending the use of long bonds typically between 10 and 30 years to bond to which lengths approaching double that as they are between states and institutions who are thinking more long term than banks, companies or individuals. Another option used previously by many countries following the world wars or financial collapse is a rest period where you do not have to pay interest for a period of time or until a certain criteria is met.

 

Debt haircuts/forgiveness:

Literally accepting a bad debt and writing off debts. This as a process is not uncommon in Greece or elsewhere in the Euro-zone, Germany had it’s debts written off after the 2nd world war for example after the previous experience of forcing measures on Germany. We also saw with the Millennium Development goals a writing off of many developing countries debts. So these aren’t uncommon and a degree of bad debt is expected among the majority of companies so it’s not impossible to imagine the same happening here.

 

Tax collection assistance:

Greece has famously always struggled to collect taxes suffering worse than many from a tax avoidance and evasion gap that makes playing for any government spending hard to measure and any growth harder to benefit the treasury.

 

GDP linked bonds:

The use of bonds that mean performance linked returns and would have a higher rate of interest on maturity the better the economy did. This would enable Greece to borrow cheap in slumps to promote growth through investment and payback as the economy improves. A policy that would not harm Greece and that would enable the state to spend money on investments that like traditional investments give you a return linked to performance. This would generate a much better scenario in the country currently suffering from staggeringly high unemployment rates if they can convince the lenders that they will not cheat them or fiddle figures.

 

Maybe some FDI ( Foreign direct investment) promises mixed with the  European Central Bank (ECB) and investment led asset purchases:

Draghi and the ECB have started QE (Quantitative Easing) expanding the money supply by 1 trillion euros which will hopefully help with the competitiveness of Greece and other countries as their products become cheaper to export however as the majority of trade in Europe is with Europe itself this wont be the silver bullet that it hopefully will be for beating the increasing threat of deflation.

Syriza may have put a halt to privatisation but that does not mean all avenues of investment are dead. A new green energy plan could be developed and part owned by another state or the European investment bank. There is also the European investment fund supporting SME’s (Small to Medium Enterprises) which could double the amount currently being spent not just in Greece but across many struggling European member states. Time limited or permanent investment deals are also a good idea as it is clear to me investment is a must both for domestic demand now to reduce unemployment and promote productivity going forward.

 

These are of course only some options available and I am sure Yanis has a toolbox of options far broader than my ad hoc ramblings here have provided. I will post again when it becomes clear of what the deal, if there is a deal, may look like.

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