Could Greece play a bailout trump card?

Faced with the threat of a forced eurozone exit, Greece has means of serious retaliation at its disposal. And these could make a bailout renegotiation more attractive than markets expect.

As European leaders nervously draw up their emergency plans for a possible Greek exit from the eurozone, one particular thought fills them with dread: what if the country simply refuses to leave?

Until now, most commentators have assumed the Greek exit scenario would work something like this: The radical left Syriza party emerges victorious at June 17 election, and the party’s leader, the 37-year old Alexis Tsipras, goes ahead with his threat to jettison the draconian austerity program that was imposed on the country in exchange for its latest €130 billion ($US163 billion) bailout.

(Indeed, the latest Greek opinion polls, which show Syriza’s support has surged to 30 per cent, suggest that this is an increasingly likely outcome.)

In that case, the eurozone will have little choice but to cut off all payments of aid money to Greece. Starved of funds, the country would have no choice but to declare itself bankrupt, quit the eurozone, and return to the drachma.

But Tsipras himself has a different idea of how it could work out. During a visit to Berlin this week, he made it clear that Athens would not leave the eurozone without a fight.

According to a report in the German publication der Spiegel, Tsipras told packed hall of journalists that "the eurozone has no owners or landlords, we're not tenants in the eurozone, we're equal partners, and no one should take on the role as owners."

He emphasised that "the treaty says no country can be evicted from the currency union.”

According to Tsipras, Syriza’s strategy of rejecting austerity and instead embracing policies aimed at boosting growth was the "only path” for Europe.

"If Syriza wins the election on June 17, it won't mean we will leave the euro, on the contrary it offers a big chance for us to save the euro. If the austerity continues, Greece will need a third bailout in a few months, and a further debt restructuring, and that could enforce a return to the national currency.”

Syriza’s approach, he urged, was "a way to save the euro. Our possible election victory offers the prospect of stabilising Europe, not causing more instability as feared.”

But although Tsipras found little encouragement in Berlin, there is increasing sympathy for his position in Paris.

In an opinion piece published in the French newspaper Le Monde, Jacques Sapir, an economist at the leading French EHESS university, argues that Greece’s austerity program is the modern-day equivalent of the deflationary policies adopted during the 1930s, with the same compulsory cuts in salaries and reductions in social security payments. And he predicts "it will result in the same catastrophes”.

Sapir points out that despite the threats coming from Berlin, Frankfurt and Brussels, there is no legal framework for expelling a country from the eurozone. "The treaties have not set out any way for leaving. Another fine example of political intelligence!”

What’s more, Sapir argues that Europe will face very serious consequences if it cuts off aid to Greece, and Athens is no longer able to pay its debts.

In the first place, Athens could simply repudiate all its debts. This would force eurozone governments, which have direct exposures to Greece through the bailout program, and through the European Central Bank, to realise their losses. In the case of France, these losses would come to €64 billion.

But Sapir points out that the Greek government could also command Greece’s central bank to print enough euros to cover the country’s short-term financing requirement. As he points out, "this measure, although illegal, is all the same technically possible. It’s basically a matter of accounting adjustments.”

Private sector organisations that are owed money by the Greek government would be only too happy to take this money, which would be indistinguishable in their bank accounts from legally printed money. As a result, private sector debts would be considerably reduced.

What’s more, Sapir points out that interest payments make up 75 per cent of Greece’s budget deficit. If Athens repudiates its debts, Greece’s budget deficit will shrink to around 3-4 per cent of GDP. This means that Athens will be able to finance its deficits by borrowing from the Greece central bank for a lengthy period of time, without worrying about fuelling a surge in inflation.

As Sapir notes "faced with threats, the Greek government has some major means of retaliation at its disposal”.

As a result, he argues that it would be far better to sit down and renegotiate the terms of Greece’s bailout. Which is precisely what Syriza boss, Alexis Tsipras wants the eurozone to do.