Greece entered its first sovereign debt crisis in December 2008 when the spread over bunds started diverging significantly. The end of this first sovereign debt crisis was in the spring of 2012, with the PSI; after causing a major depression after two years of austerity for its people and no equivalent austerity for its sovereign near defaulted borrower and despite MOU # 1 of 2010. On determining the non sustainability of the debt, the Greek state, in agreement with its official lenders, defaulted officially towards remaining foreign private lending institutions, its own banks, hospitals, universities, insurance companies and pension funds. It was then said that the level of debt forgiveness was adequate for restoring macroeconomic balance and that growth was just around the corner otherwise. This restarted the clock on the greek sovereign debt crisis, with MOU #2.
The big differences of MOU #1 and MOU #2 were the author and the emphasis. MOU #1 was written by the IMF even prior to 2010, when it was signed, in its various reports and analyses. It had four axes: increased taxation, decreased government spending, market liberalization, state reform. MOU #2 was written effectively by the largest bailout partner, Germany, with debt repayment only in mind to please its own constituency: many more taxes, less social welfare, english law, save the banks, privatize indiscriminately, high primary surpluses forever, and a formal repetition of some of the previous stuff on which nothing had been done; and never subsequently really pressed to do. It is a surprise it even recognized that the actual debt had gone up despite the partial forgiveness, which is the first admittance of amajor failure of the program. The IMF, despite words to the opposite, was coerced to follow and used unrealistic growth projections in the middle of a unique historically non war related depression, to justify the impossibility of debt sustainability.
2013 and 2014 were a demonstration of further economic collapse, despite non educated political hooliganism, mistaking as underlying long term growth what was essentially a one off tourist boom and some further defaults of the Greek state to its own citizens. Yet it was clear to anyone willing to think, that the underlying problems and country management that had brought the greek state to collapse had not only not improved, but instead remained either the same or even deteriorated. Thus, despite a lot of words to the opposite for some time, especially by the Greek sovereign's management team, the enforcers of MOU #1 and #2, based on reality, told the management to clean up their act. But cleaning their act required either accepting their failure and renegotiating, or defaulting, or continuing squeezing the people and not the continuously spendthrift and unproviding Greek state. Or abandoning ship, which is what they did, and handed over the hot potato.
It is clear that no debt forgiveness or other substantial change was agreed in the latest Eurogroup, despite the noise. It is rather clear that until a new program is agreed the MOU #2 still holds and shall sort of be concluded. Unless there is some hidden agenda for Athena delenda est through e.g. Malta's parliament not accepting the agreed extension of the loan, it seems that agreement was reached on discussing a sort of new program. Such new program or MOU #3, if concluded, will effectively restart the clock on the debt crisis for the 3rd time.
As argued in the past and as 100% of american economists insist upon, debt forgiveness of a massive scale needs to be accepted if Greece is not to eventually default, sooner or later, with plenty of collateral damage. No one of those insisting on it thinks of this as a sufficient condition for eventual debt sustainability or growth, yet it is clear that it is a necessary precondition for debt sustainability and growth. So the risk remains that once again European politics of federalist compromising will fail to do what is really required to at least give Greece a chance and MOU #3 will not be a solution but rather another 10-15% drop in GDP and disposable income; and a poor, destabilized, and haunted by vulture funds Greece shall be the only thing left.
This is where the current government has only one option: to eventually insist on debt forgiveness after showing that it can do good things for Greece's economy with the risk of a meltdown everpresent. Does it have the strength,guts, popular support and clear thinking to do so? Will it ultimatelybe able to explain to Greeks the need to default if the debt forgiveness does not take place? Does it have the guts to then ridicule the eurozone by refusing to leave while defaulted (after all, Detroit did not leave the dollar when it defaulted...)? Does a blind to economic reality opposition (ex-government) have the guts to stop arguing in favor of its failure of achieving a primary balance through pauperization? Does (Germany's) Europe have the willingness to go on with the European Project and show true solidarity and lack of stubborness? Does Germany's government have the guts to accept reversing the european catastrophic policy of austerity and explain it to its people? After all, the lenders' governments can never recover the money used for saving their own banks, only pretend to do so till they have also handed over their own hot potatoes to others.
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