Greek Debt Crisis: Creditors Must Moderate Their Demands or They Will Be the Losers

19/06/2015 13:33 BST | Updated 17/06/2016 10:59 BST

In trying to understand the Greek debt crisis I have found four insights particularly helpful:

First, that the debt will probably never be paid back in full and Greece will eventually enter into a major default. A small country like Greece can simply never pay off such a massive debt.

Second, neither "the Greeks" nor their government have actually been "bailed out". Most of the cash created supposedly to bail Greece out has actually gone to the private banks who foolishly bought Greek government debt before the financial crisis in the unwise belief that it was as safe as the German variety. It is these bondholders who have been saved, not the Greek government or people.

Third, as a result of the European Central Bank bond buying programme, a huge amount of the risk of Greek default has by now been transferred from private banks to European taxpayers, primarily in Germany but also substantially in France, Italy, Spain and the Netherlands.

Fourth, national pride apart, the Greek economy would stand a far better chance of moving out of depression if it were to default and/or if Greece were to leave the Euro. Life would be tough in the short term with a devalued drachma, as it was for the Icelanders when they politely told the financial elite to get out of town. But, as with Iceland, the chances are that within months Greek exports would expand, tourism would boom and tax receipts would grow. By contrast if Greece tries to pay the debt in full, it will mean decades of spiralling debt, austerity, economic depression and penury.

So far the only group made to pay a substantial price for this dire situation are the Greek people, the ones who actually bear the least guilt. There were Greek politicians who fiddled the books. There were Eurocrats (whose ambitions for European unity got out of hand). There was the European Central Bank (that imposed a single low interest rate across the whole of a very economically diverse Europe). And there were private banks (who eagerly bought up Greek government debt thinking they were onto a sure thing).

Compared to these, the Greek people themselves played only a minor role in the disaster that was to unfold. True, some Greeks enjoyed the benefits that came from lax labour rules, the rich especially profited from ineffective tax collection, and others enjoyed overly-generous public sector pensions. Reform on all these fronts is needed. But on the whole, the Greek people were guilty only of the usual sin associated with democracies: they simply didn't enquire too much about how all the apparent prosperity before 2007 was really possible.

That changed in late 2009 when, following a sharp increase in the debt to GDP ratio, Greek government bonds were downgraded to junk status. From then on the ordinary Greek people, and they alone, were deemed responsible for the mess. From being noble forbears of the European ideal, they were declared idle good-for-nothings. Only they were to be forced to pay - by slashing public services, decimating salaries and pensions, increasing taxation and selling off national assets on the cheap.

All this was to ensure that banks, which had made ill-considered investments, could be protected from the consequences of their own actions. A blood-sucking austerity campaign ensued, in which cuts of all kinds were used to keep up debt repayments. Overseen by the so-called "Troika" (the European Central Bank, the EU Commission and the International Monetary Fund), the Greek people have endured five long years of depression, disappearing public services, plummeting living standards, deteriorating health and mass unemployment. A particular injustice is the price paid by young people, half of whom are without work.

But now the whiff of default has wafted into Troika headquarters. Both the inevitability and the benefits (to Greece) of default are asserting themselves over Troika fantasies. The Troika's rebuff of the Syriza government's moderate expectation that their creditors refrain from excessive demands has placed default back on the agenda. Suddenly the complacent claim that Greek default contagion can be "contained" does not sound quite so confident. German politicians do not relish having to explain that, in the event of default, German citizens are liable for an estimated 73 billion Euros of Greek debt. And it is apparent that an intransigent Troika, already hated by the Greek public, looks like a very attractive candidate for political blame by Greek Prime Minister Tsipras, if and when he has to explain why default was left as his only reasonable option.

Who knows what the outcome of this latest cliff-hanging crisis will be? I do not know any more than anyone else. But I do hope that European politicians and financial technocrats come to their senses. Is it really so difficult for them to understand that in the face of bankruptcy wise creditors must moderate their demands in the hope of something rather than nothing? And maybe the Greek public will finally come to realize that, when it comes to debt default, sooner is usually better than later.