Greek Prime Minister Alexis Tsipras rolled into the St. Petersburg International Economic Forum on Friday to make nice with Russian President Vladimir Putin – not that it will make one iota of difference in saving Greece.
Greece is so small that Russia could easily afford to bail it out; one of Mr. Putin's ministers hinted that Russia was willing to help. Doing so would amount to the cost of a few aircraft carriers or subsidizing a minor land war in Ukraine. But he's not going to do it.
Mr. Putin has enough geopolitical problems of his own. If he were to bail out Greece, the United States and Europe would assume that Russia's next move would be to park its navy in Piraeus. Mr. Putin probably also knows that Greece is a terminal case.
More loans won't fix Greece; the opposite in fact. That's because the creditors' treatment of Greece constitutes the greatest Ponzi scheme on the planet (sorry Bernie Madoff). Mr. Tsipras knows that too, which is why Greece is barrelling toward default – he has said as much. The big question is whether some political and financial fudge will allow it to remain in the euro zone and the wider European Union if it does stop paying its debts.
Greece is insolvent, bankrupt, illiquid, economically dead – the sovereign version of Monty Python's parrot. The creditors – the EU, the European Central Bank and the International Monetary Fund – have the numbskull idea that shovelling more loans into Greece will bring the corpse back to life. The trio of creditors will release €7.2-billion ($10-billion) in loans remaining from the previous bailout if Greece launches another round of austerity, which would include an increase to the value-added tax (VAT), a gutting of the pension plans, and assorted other trims and cuts. In other words, another nasty round of austerity on top of the previous nasty rounds of austerity.
No one feels sorry for Greece. It was largely the author of its own misfortunes, to the point it lied about the true size of its debt, treated tax collection as a part-time hobby and decided that economic diversification meant buying BMWs and stuffing pristine islands with cheap resorts. But anyone with an IQ greater than feta cheese should know by now that austerity is a growth killer, which is why Greece is incapable of emerging from recession. Except for a brief flirtation with growth last year, it has been swirling down the economic toilet since 2009. "VAT going up and pensions going down constitute reductions in the standard of living," Neil MacKinnon, managing director of VTB Capital, said Friday on the sidelines of the St. Petersburg economic forum. "That will depress the economy even further."
The creditors want to hand Greece more loans to pay off loans that are coming due this summer (Greece owes the IMF almost €1.6-billion by the end of June). But austerity will ensure that Greece will lack the means to pay off those new loans. That's the Ponzi scheme – new loans to pay off old loans, to be inevitably followed by new loans to pay off old loans.
Everyone knows that the solution is a debt writeoff, and a big one. But even though the IMF has raised the idea of another debt restructuring – Greece crunched its privately held debt in 2012 – the IMF will not take one itself. It wants the EU to take the "haircut," as it's called. But the EU would sooner see Mr. Putin annex another chunk of Ukraine that write off its loans to Greece. A Greek default would cost the taxpayers of Germany and France alone about €60-billion. Try explaining a loss of that size to your voters. Already, half of the voters in Germany would like to turf Greece out of the euro zone, and that's predefault.
The next few weeks, maybe few days, will make or break both Greece and the euro zone, and things looked dire by the end of the week. On Thursday, a meeting of the euro zone finance ministers, which included Greece's Yanis Varoufakis, made absolutely no progress. The euro zone summit meeting on Monday is emerging as the true make-or-break session. "The game of chicken needs to end and so does the blame game," European Council president Donald Tusk said Friday.
Greece has been accused of suicidal tendencies by not giving in to creditors' demands. But accepting more austerity for more loans is no less suicidal than a default that could send it hurtling out of the euro zone.
How to end the standoff? The EU could commit to some sort of debt writeoff in exchange for diluted austerity and economic reform. Or Greece and the EU could throw in the towel and decide that both sides would be happier and healthier without one another's company. It could go either way. A Greek default and exit from the euro zone would be nasty and painful, but there are precedents that are somewhat encouraging. Argentina defaulted and ended its currency link with the U.S. dollar in the early part of the last decade and managed to survive, if not quite thrive.
What is certain is that piling more loans onto more loans in exchange for economy-busting austerity is madness. At best, it would buy Greece some time before a long-term solution is found, and the EU is lousy at finding long-term solutions. At worst, it would keep Greece in perpetual recession, guaranteeing a Greek exit in a few years. And who knows what other undead countries – Italy, Spain, Portugal, Cyprus – would go crashing out with it?
Greece is right to resist another hash austerity-for-loans deal. The next few days will be chaos as the IMF demands its money back. Greek banks, kept alive only by fresh doses of liquidity from the ECB, could go bust. Mr. Tsipras could face a confidence vote or election. The creditors could descend into infighting. The markets will wobble, or worse, as the very integrity of the euro zone comes into question.
Throughout all this, Mr. Putin will be watching with amusement, knowing that he alone doesn't face grave geopolitical problems.