The next days will define Greece’s prime minister. Alexis Tsipras must choose between saving his country and sticking with a bankrupt ideology. If he is brave and smart, he can secure a few more concessions from creditors and a goodish deal for Greece. If not, he will drag the country into the abyss.
For months, Tsipras has been trying to ride two horses simultaneously. He wanted to find a deal with Greece’s creditors which kept the country in the euro zone while jacking up public spending and unwinding reforms that are making Greece more competitive.
The prime minister continued this tricky double act in a speech to the country’s parliament on Friday. He dismissed proposals from the euro zone and the International Monetary Fund – calling them “irrational”, “illogical” or “absurd’’, depending on who was doing the translating to English – while also saying Greece was ready to compromise and was closer than ever to a deal with its creditors.
On the same day, Athens failed to pay 300 million euros it owed the IMF. This did not constitute a default, as Greece has taken advantage of a rarely-used IMF rule that allows debtors to pay all the money they owe in a single chunk at the end of a particular month.
The new deadline of June 30 for paying 1.6 billion euros means Tsipras will not be able to ride both horses much longer. He will soon have to decide whether to come to terms with his creditors. He can improve the “irrational” offer on the table a bit, but not by a lot.
First, though, look at the consequences of both options.
If he does a deal, he may split his radical left Syriza party. But he would be able to call a new election, kick out the rebels and probably win a fresh mandate with an increased majority.
Although Greece would benefit and Tsipras himself would stay in power, he might balk at this option, because it would involve tearing himself away from his intellectual home on the far left. Erstwhile comrades might call him a traitor.
On the other hand, not doing a deal will result in bankruptcy followed by capital controls and probably exit from the euro. Tsipras might see his popularity plummet and be ejected from office.
It is possible that Tsipras himself doesn’t know which way he will jump. Both options must seem ghastly, which is presumably why he is still desperately seeking a better trade-off.
One probably exists, based on the principle that Greece accepts structural reforms so long as the creditors ease up on austerity.
In detail, this would mean that the creditors would no longer insist on two particularly unpopular measures: putting up the value-added tax rate on electricity from 13 percent to 23 percent, and cutting low-income pensions. In return, Athens would accept the rest of the creditors’ proposed VAT and pension reforms – which, among other things, will reduce tax evasion, increase retirement ages and make the pension system financially sustainable.
Such a deal would, of course, leave a hole in Greece’s budget. About half of this could be filled by letting Athens aim at a primary surplus, before interest payments, of 0.6 percent of GDP this year, as the government has suggested, rather than the 1 percent that the creditors want.
Greece would have to find alternative measures to close the remaining gap – ideally by cutting spending or, otherwise, by taxing less vulnerable people.
Athens would also accept the other reforms on the creditors’ list: not just the ones Tsipras already advocates such as an independent tax agency and a crackdown on corruption; but things that are harder to swallow such as privatisation of the electricity grid and creating a more efficient civil service.
The prime minister would also have to withdraw his plan, announced on Friday, to restore collective bargaining rules unilaterally. Instead, he would agree to the creditors’ proposal that the current regime be reviewed.
The euro zone would dangle two more carrots. First, it would commit itself to relieve Athens’ debt burden when a third bailout plan is negotiated in the coming months, so long as the government sticks to the agreed deal.
Tsipras’ own debt restructuring plans which, among other things, involve euro zone countries writing off part of the debt and replacing another chunk with bonds whose principal is never repaid, is politically a non-starter. But it should be possible to lighten the load by extending the current debt-servicing holiday and giving Athens longer to repay its debts.
Second, the European Central Bank would provide liquidity directly to Greek banks so they don’t have to rely on emergency liquidity assistance from the national central bank. The ECB would also include Greek government bonds in its massive “quantitative easing” bond-purchase operation.
It is not certain that Tsipras can negotiate such a compromise. But the basic philosophy of more reform in exchange for less austerity will appeal to some of his creditors – provided he can deliver the message with conviction. And to do that, the Greek prime minister will need to show what sort of a person he really is. This is his defining moment.