This Greek debt crisis started more than five years ago. The three major credit rating agencies downgraded Greece’s credit rating in December 2009 over concerns about repaying high levels of debt.
The Eurozone country has since introduced a series of austerity measures and obtained various bailout packages. As last month’s economic update video explains, the 13 July agreement happened after Greece became the first developed country to miss a payment to the International Monetary Fund, having already delayed it once.
Cliffe’s lessons were written with that July deal in mind.
Lesson 1: Make sure that you have an explicit and credible “Plan B” Former Finance minister Yanis Varoufakis claims that Greece, if it failed to get external finance, had a secret ‘plan B’ to introduce a temporary currency linked to the euro. But while the banks were closed and with the economy struggling, the creditors believed that Greece had either to accept its terms or face an economic meltdown. Other populists elsewhere in the eurozone will have to reflect on this before eyeing the euro exit door.
Lesson 2: Game theory is tough to apply in practice Varoufakis, an expert in game theory, lost out on this one. Not only is the eurozone a multi-player game, with each player having distinct motivations, it is also a multi-period game, rather than a one-off game: you have to recognise that other players will remember how you behaved before, and act accordingly.
Lesson 3: “Kicking the can down the road” makes it bigger Eurozone creditors remain reluctant to write-off Greek government debt, as advocated by the IMF. While politicians attribute this to eurozone rules, it stems more from fears of a voter backlash if they acknowledge losses on loans to Greece. The strategy of lowering interest rates and lengthening the payback period on the debt – ‘extend and pretend’ or ‘reprofiling’ – is less embarrassing than partly writing off the debt, but is likely to prolong the agony.
Lesson 4: Trust matters The negotiations became acrimonious, and violent swings in bargaining positions (particularly from the Greeks) got in the way of striking a deal. In the end, trust is essential in any financial transaction. Sadly, given the Greek Prime minister Alexis Tsipras criticised the deal as ‘blackmail’, mutual mistrust will persist.
Lesson 5: Don’t make important financial decisions at night The sight of bleary-eyed politicians announcing a deal at 7am after sixteen hours of negotiations should serve as a warning.
For the full list of Cliffe’s 21 lessons from the Greek crisis, see the 2Q edition of ING’s quarterly online magazine ing.world.