Council on Foreign Relations
June 22, 2011
The Greek sovereign debt crisis has entered a critical phase. The four protagonists--the Greek government, its creditors, the International Monetary Fund, and the leaders of the eurozone--all feel they have been pushed as far as they can go; further concessions may be beyond them. Even though the Greek government narrowly averted disaster by surviving a no-confidence vote last night, the country's prospects look grim. If it tips from managed austerity to chaotic default, the shock will convulse the eurozone.
Consider first the position of the Greek government. It is being asked to free up money for debt repayment by inflicting austerity on its people. Having already slashed pension promises and presided over an increase in unemployment since 2009 from 9 percent to almost 16 percent, it is now supposed to cut the public sector payroll by a fifth and privatize state industries at the unlikely rate of nearly one per week. And even if it does these things, Greece will still be staggering under impossible quantities of debt. Not surprisingly, citizens have taken to the streets and the government's grip on power is slipping.
Next, consider Greece's creditors. They are not programmed to forgive debt in the name of eurozone stability; they have a duty to their shareholders to claw back their money. So when Europe's leaders say that banks should "voluntarily" roll over Greek debts rather than demanding repayment, they are invoking a fairy godmother that does not exist.
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