Greece’s Pyrrhic Victories

C J Polychroniou explains how the latest pair of efforts aimed at addressing the Greek crisis, the newest bailout package and the bond swap, create tremendous complications down the road even if they may offer a temporary respite.  As you know, the bailout money was shackled to a series of grim austerity measures that will push the already struggling nation further under water.  But his analysis of the bond swap is even more intriguing.

One way of getting at the political challenge in the eurozone is to note that many powerful economic solutions involve, not to put too fine a point on it, reinvesting resources from countries like Germany into countries like Greece.  This is something that happens all the time within units that understand themselves as nations (or aspire to such an understanding.  As Dimitri Papadimitriou and Randall Wray point out, after reunification Germany invested resources in the former East Germany in much the same way).  But the question of whether revenues from New York are being shoveled into Mississippi rarely becomes a live issue.  Within the eurozone, however, these distributional questions are fraught with political peril; dooming a whole host of solid policy solutions.  And Polychroniou suggests that the restructuring of roughly 200 billion euros in private debt that just took place may have actually made these political dynamics worse (while also making life more difficult for Greece if forced out of the eurozone):

the bond swap was a deal forced on private investors, … yet the new bonds have been issued under foreign law. This doesn’t mean that the Parthenon is at risk of one day falling into the hands of foreign creditors, but it does mean that the Greek government has lost whatever strategic advantage it may have had in the ruthless game of sovereign debt restructuring. For one, all of Greece’s debt is now wholly owned by public institutions (with European taxpayers bearing much of the cost), so the next debt restructuring phase could entail political, not merely economic, consequences. Simply put, it could pave the way for Greece’s forced exit from the eurozone. Indeed, given the prevailing sentiments toward Greece across Europe, it is most unlikely that European taxpayers will accept kindly the idea of getting stuck with Greece’s bill while allowing a pariah state to remain in the Union. However, in the event of an exit from the eurozone, Greece will no longer be able to pass legislation to convert euro-dominated debt into new drachmas.

Read the whole thing here.