The Thought Office

The last few weeks have captured the maelstrom of European politics: brinkmanship from Greek politicians wrangling over another debt deal, a liberal flair from Mario Monti as he tries to rekindle the Italian economy and a clarion call from the Germans for greater “fiscal integration”.

The outrageous vetoes from China and Russia on Syria also served to remind Europe that it must meet its international obligations. Most notably, encouraging the continued democratisation of Arab states.

After the cacophony of the last month, perhaps we should take a step back and take stock of some of the finer details. Here, we will be analysing the latest Greek bailout.

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At present, Greece’s debt is equal to 160% of GDP. That’s a pretty a hefty sum. But that shouldn’t come as a surprise to most homeowners – mortgages are usually multiples of household income. In the UK, the average house-price-to-income ratio for the last 30 years is 4. In Japan, debt-to-GDP is a whopping 225%, but poses less threat than in Greece. So why is Greece’s debt stirring such a raucous?

The problem isn’t so much the level, but the cost of “servicing” the debt. This is the annual cost of paying interest on outstanding debt. Mortgages may be well over 100% of household income but homeowners will also know that mortgages are the cheapest form of borrowing. In Greece, the interest rate on the government’s debt has reached frightening heights. This eats into the government’s finances. Moreover, there is an opportunity cost as money is diverted away from social infrastructure, such as education, towards paying off Greece’s lenders.

Greece’s situation is unsustainable. Athens has previously gone, cap in hand, to the rest of the EU when it could not meet its repayments. That was Greece’s first bailout in April 2010. Two years on, Europe is thrashing out the details of a third bailout.

Along with the tranche of funds from the Troika of the European Commission, European Central Bank and International Monetary Fund, the Greek economy has been forced to swallow tough austerity measures. This has sparked the fierce riots running through the veins of Greece.

Finally, the latest deal would see private creditors accept a cut in their holding of Greek government bonds, reducing the absolute level of debt. Though, the current round of cuts runs deeper than before. Investors will lose 70% on the value of their bonds.

Lucas Papedemos has cut a calm, calculated and - most importantly - reliable figure at the helm of Greece. However, his technocratic government was established only temporarily after the erratic departure of the previous Prime Minister, George Papandreou.

The centre-right New Democracy party are likely to take power in the upcoming election. Their effusive leader, Antonis Samaras, will not shy away from some hardball with Europe. Whereas the technocratic government was an outfit for Brussels to quickly administer austerity, any elected leadership will have to answer to the people. However, the New Democracy party have promised to continue the reform program if they win. But the Greek people’s tolerance has long been passed.

Last year had been dominated by the fiscal hawks, who immediately took an axe to government finances in response to the debt crisis. However, the worsening situations in Portugal, Spain and Greece have rebuffed the conservatives. The IMF, too, have changed tact. To escape the crisis, policy makers must be pragmatic. Measures that encourage growth will be crucial.

After the nadir of 2011, the scene seems ripe for further tragedy: a struggling economy, the disillusioned youth, the burning silhouette of Athens and a lack of political backbone. But after the elections, the Greek people will once again take charge of the script for their crisis-worn nation. Hopefully, the writers aren’t on strike.