Surprising Role Reversals in the Never-Ending Greek Debt-Slavery Saga

The Never-Ending Greek Debt-Slavery Saga has yielded three remarkable role reversals among core, agenda-setting Western institutions.

If you remember the glory days of the Washington Consensus, the baddest of bad guys in the global neoliberal capitalist order was the International Monetary Fund. It was the star of the currency and sovereign debt crises of the 1980s and 1990s; all of whom had the same basic script:

Step 1. Globally-mobile capital from rich countries would flow into emerging markets (EM), buoying up thinly-traded asset markets and currencies.

Step 2. Shocks to risk aversion back home in the center of the world economy would prompt a dramatic reversal of said capital flows.

Step 3. Rapid capital outflows would lead to a crash in EM assets and of EM currency against the dollar; and therefore, a sharp increase in the dollar-denominated debt of the unfortunate state caught naked when the tide went out.

Step 4. The IMF would step in with a bailout package in exchange for harsh austerity measures and painful reforms that usually included a wholesale privatization of the state’s assets.

Most poor and developing nations wised up around the time of the 1997 Asian financial crisis. All of them, almost without exception, resorted to building up hard currency reserves (mostly dollars) for national insurance during good times. This was the financial equivalent of nuclear proliferation prompted by US aggression. Just as a nuclear deterrent guaranteed insurance against a US invasion, a big enough pile of US dollars ensured freedom from IMF-imposed debt slavery.

One consequence of this international politico-financial interaction was a secular rise in the global savings rate–that Ben Bernanke called the “global savings glut.” (See Figure 1.) In turn, the higher savings rate pushed down global interest rates and powered a credit boom in the United States; with well-known results.



In light of this history it is extremely interesting to watch the IMF play the nice guy through the Greek debt crisis. The IMF has been urging debt relief for years. Northern Europeans in general and Berlin in particular, used to play the good guys back in the 1990s. But since the beginning of the eurozone crisis, Berlin has led northern European creditors on a self-defeating Shylock’s quest. The humanitarian and economic costs of the austerity imposed on debtor countries of the Mediterranean have been substantial across the board. For Greece, they have been nothing short of a catastrophe. (See Figure 2.)

Figure 2. Greek GDP and Prime Age Unemployment (Source: FRED)

Ahead of the negotiations this week, the Fund released an official debt sustainability analysis calling for substantial debt relief, saying that it would only participate if the Europeans could prove that the “numbers add up.” (See panel.)

The Fund proposed 24-year payment deferrals, 40-year maturity extensions, and 1.5 percent caps on interest rates. The only thing that it did not ask for was an outright debt writedown. But it might as well have. The difference is semantic; even if politically potent for the Germans. The fundamental fact is that Greece cannot pay back all the money that it owes. And the Germans know it too.

The Germans were insisting that Greece maintain a 3.5 percent primary surplus, while the IMF has been arguing that no more than 1.5 percent is sustainable. (The primary surplus, receipts less spending before interest payments and debt repayments, is a basic measure of fiscal austerity: 1.5 percent is medium austerity; 3.5 percent is draconian.) The Germans have yielded on this front.

More fundamentally, as with previous deals the current deal amounts to kicking the can (further) down the road. The Europeans will pay the Greeks to repay the Europeans. It’s not even two different institutions! They are literally giving with one hand and taking from the other. German economists Stahmer and Rocholl showed that more than 95 percent of the 216 billion euro Greek bailout has found its way back to the coffers of banks and creditors.

And so the charade of the Never-Ending Greek Debt-Slavery Saga continues.


Now for the third and last role reversal. Remember how the New York Times used to be more progressive and, yes, leftist, than the business press? Not any more. Reading this report by James Kanter, I had to go up twice to make sure I was not reading an opinion piece.

In the very first paragraph, we are told that the IMF is “threatening to create more political and economic uncertainty at an already tumultuous time for Europe.” Later we learn that,

The fund is playing the role of the financial police, adamant that Greece will never return to growth if its debt burden is not sustainable. And Germany is the political pragmatist, leaning on Greece to stick with its austerity commitments lest it set a bad precedent for future bailouts and provoke unrest at home.

One could perhaps forgive this sort of nonsense on the pages of the Grey Lady if it were an Op-Ed by Paul Ryan or another ultraconservative idiot. But on page B2? What the hell is going on at this newspaper? Contrast that to the premier newspaper of global finance (sinister music), Financial Times:

As has now been the pattern for several years, the pressure to recognise reality has come from the IMF. The fund realised much earlier than the eurozone authorities that the programmes of fiscal tightening and microeconomic change being pushed on Greece would not provide a sustainable exit from the country’s recession and sovereign debt burden…

…the eurozone must confront the reality that some form of relief from official creditors is a non-negotiable part of giving the country a chance of returning to economic sustainability.

One way or another, these operations will represent a transfer of resources from the eurozone creditors to Greece, whether or not they are labelled as such and even if they avoid a politically explosive writedown in face value. So be it. The eurozone must shoulder some blame for its predicament.

What is going on with all these role reversals? Next thing you know, the GOP will start ranting against globalization! Oh, wait.


4 thoughts on “Surprising Role Reversals in the Never-Ending Greek Debt-Slavery Saga

  1. Factor some geopolitics into your observations on the IMF and you can see the underlying logic for this. Think of the IMF as a co-dominium between the US and France, exemplified by its Managing Directors usually being French or allies of France, while the US controlled the budget and dominated voting power. In the 1980s, the US and France were aligned in an anti-Soviet front, allowing the IMF to operate smoothly. The 1990s were a period of the US aligning more with an emerging Germany to constrain France. The organization didn’t do much during the 2000s, but returned to prominence in the aftermath of Germany’s rise to the status of economic hegemon of Europe post-Eurocrisis. The IMF now operates mainly as a Franco-US tool to block both Germany and Russian influence from expanding in the Eastern European borderland between the two; note where preferential treatment by the IMF typically ends up, from Greece to Ukraine. Maybe I’m missing something with this rough framework, but perhaps you know where to fill in the gaps.

  2. The IMF has largely been a tool of US policy throughout its history. It has at times charted an independent position at odds with official policy. But the gap has been no more than that between the various national institutions (White House, State Dept, Pentagon, CIA, Senate).

    Within this picture, the role reversal is simply be an artifact of the divergence between US and European interests. The Germans face pretty severe domestic political pressure against the provision of debt relief. The Americans on the other hand would prefer to stabilize the situation and get on with the recovery. More generally, Americans have shown themselves to be much less ideological than the Germans in dealing with the Western financial crises and the ensuing recession (another role reversal!). And that clearly has to do with the political unity of the United States vis-á-vis the multilateral nature of the European Union. To borrow Krugman’s analogy, no one in Washington questioned fiscal transfers to Florida, where the crisis was almost identical to that in Spain.

    Not sure what the introduction of the French connection would buy here. If you’re a regular reader, you’re probably aware of my aversion to adding in unnecessary variables. Tell me what additional fact we can explain by not ignoring the French entirely.

  3. “Within this picture, the role reversal is simply be an artifact of the divergence between US and European interests.” The Germans have an ideological obsession with austerity, one they are trying to export throughout the Continent. Take US geopolitical imperative to prevent any region from falling under the dominance of a single hegemon into account. Then look at the Regional Security Complex Germany falls into, to reference a theory I know you ascribe to. According to Buzan’s framework, bolstering France will reduce German influence.
    France entered the picture during the Cold War. It has always fought to be the member of the “Free World” with the most sovereignty over its own affairs (hence kicking NATO bases out and placing itself at the center of the EU predecessor institutions). France’s geopolitical grand strategy involves ensuring itself a seat at the table of major powers (hence the colonial strategy of always holding territory from which it could theoretically harass the Brits). This is merely a modern equivalent of this grand strategy.
    Adding France as a player provides a why for the IMF being relatively soft on Greece. The US has this institution which it operates jointly with France. And it is aligned geopolitically with France in Europe. It makes sense to use said institution as a tool to hold back German hegemony. It fits US geopolitical imperatives, as well as French.

    1. According to Buzan and Waever, the EU is a security community, by which they mean that security competition between EU member states has become unthinkable. I see it as the European great power RSC being overlaid, by the superpowers during the bipolar era and by the unipole since. In either case, the end result is that these states do not securitize each other. The US is not balancing Germany, with France or what have you. All of Western Europe is under US protection, and the American pacifier has in effect outlawed any threat of violence between regional powers. That’s not what’s going on here.

      What’s going on is that even in this post-history, European powers continue to have disagreements over continental affairs. These are now resolved through a form of demilitarized alliance formation. Germany has gotten its way by getting a bunch of other states to follow its lead. Germany hegemony is about the willingness of other EU states to follow. And indeed, France even under Hollande, had followed in lockstep.

      German geoeconomic hegemony is fine by the US; as long as shit gets done. What the IMF scold means is that the US is unhappy with shit not getting done. In this business, the US is doing the Europeans a favor. But to be sure, the security alliance structure is decidedly not at stake.

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