Syriza's Failure Has Been To Not Maintain The Fiction That All Debts Will Be Paid

Banking and financial systems can only work in the conviction - often no more than a polite fiction - that all debts and financial obligations will be paid. This is why householders, when they are unable to make the payments on their mortgages, are often offered a payment holiday with the arrears and interest on them added to the capital outstanding. In corporate finance, most financing is the refinancing of a less convenient, or more expensive, obligation. The assurance of future payments is also why banking and finance cannot flourish in autocracies or where warlords or gangsters arbitrarily vary payments. Syriza’s high risk strategy has been to insist that debts should be written off, and then that its government budget should not be subject to guidance from its partners in Europe. That strategy has been undermined by the withdrawal of bank deposits, with even larger transfers to banks abroad, in anticipation of and forcing, the bank restrictions that have now been imposed.

The imposition of capital controls and limits on bank withdrawals is the first step in the unravelling of that strategy. The ultra-left in Syriza see this as the first step in the country’s exit from the Euro-zone. For them, and most other economists across the whole political spectrum, that exit is a necessary prelude to an economic recovery that it believes will happen as soon as Greece obtains a currency that can be devalued. This is a false hope for two reasons. First of all a government attempting this is unlikely to survive in a democratic Greece where the majority of the population, despite the reduction in their living standards, want to stay in the Euro-zone. Secondly, the benefits, if any, of a devaluation would turn out to be meagre: import costs would rise and real incomes would fall further, and that's assuming the the devaluation does not result in hyper-inflation.

capital controls and the limit on bank withdrawals is already creating a devalued currencyIn fact capital controls and the limit on bank withdrawals is already creating a devalued currency. Greeks can still use internet banking. However, the vast majority of Greeks are employed (or perhaps more precisely under-employed) in small and medium-sized enterprises. These businesses have, as elsewhere in Europe, traditionally operated largely on a cash basis, and that cash is now in seriously short supply. Proponents of alternative currencies may rejoice at the opportunity to introduce such currencies. But without conversion into Euros at a guaranteed rate, these are likely to have marginal purchase. More likely tourists will be offered discounts for cash payments creating an effective devaluation of bank deposit currency against its cash counterpart. Employees in Greece earning salaries paid into bank accounts will find themselves worse off than those who can obtain income in cash. Tourists should therefore leave large tips (in cash) for waiters paid in inconvertible bank credit or meals at their workplace.

The political risk for Syriza is that its electoral support will seep away in recriminations after it loses its referendum on the current debt offer or, if it wins that referendum, in the privations that the economy and Greek society must suffer under a regime of capital controls and limited bank withdrawals. The irony is that when it eventually falls it will be succeeded by a government that will maintain the fiction that all debts and budget indicators will be respected and, through this accommodation, obtain for Greek economic reconstruction all the concessions that Syriza failed to secure from its European partners.

Jan Toporowski is Professor of Economics at SOAS, University of London

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