The Wikipedia entry for a Pyrrhic victory is "a victory that inflicts such a devastating toll on the victor that it is tantamount to defeat". The collision of opposing interests between a Greek government (which possesses a popular mandate to push back against more austerity), and its creditors (who want to assurances that their loans will be repaid) seem likely to result in just such an outcome.
It's obvious that without substantial debt relief, there is no way that Greece will be able to repay any of its debts, with the current debt to GDP ratio at 175% and rising. Without such relief, the nuclear option of default almost looks like common sense.
Conversely, it is equally obvious that without the Greeks agreeing to significant cuts in spending and changes to their tax system, there is no way that any self respecting lender should or would agree to throwing more money at their government: doing so without such a program in place would merely guarantee a repetition of the current arguments in the next 6 - 12 months when the next loan repayments come due.
Logic suggests that a compromise of some debt relief and some spending cuts should produce a deal that results in equal amounts of satisfaction or dissatisfaction for both sides.
However, a collision of this type between politics and logic was never going to be pretty: both sides seem to view the current negotiations as a zero sum game in which one side or the other has to achieve total victory even at the cost of actual disaster.
If we then assume that the Greeks' least worst option is to default: what next?
A huge mess.
Default by Eurozone member was never envisaged when the brains behind the Euro project dreamt it up originally. Such grubby practicalities would have got in the way of the grand dream. That lack of foresight is now proving costly for all concerned. The Greeks seem keen to remain within the Euro, but without the painful restructuring that has to go with that. However, it also seems that there is no mechanism to force them out against their will. But - if they don't exit the Euro, they will be stuck in a currency that is too expensive for their own good and will have been cut off from all sources of debt financing for a decade. The cuts in spending that the lenders have been asking for would be inevitable and probably more brutal. Greece would sit within the Eurozone as a failed state.
If Greece did exit the Euro and reinstated the Drachma, they would devalue and gain some competitiveness benefits. Unfortunately, these would be limited given Greece's fairly small export base. Tourism might benefit significantly, but the offset to that would be whether or not tourists would want to visit a country which would be facing social melt-down. The further downside of re-instituting the Drachma would be that debt to GDP would rise even further (because the loans in Euros would compare with a significantly devalued Drachma priced economy), unless the Greeks declared a unilateral write-down to more manageable levels(probably by something like 75%).
From the lenders' perspective, it becomes a question of whether or not you agree to a partial write-off and extended repayment terms on the rest, or force Greece to default on everything. That would be painful for the various Eurozone governments who between them have provided Greece with about half of its total loans. Even Angela Merkel might have trouble explaining how she managed to lose EUR56bn...
So, common sense would suggest a deal between Greece and its creditors is the most logical course. However, whether or not politics and egos get in the way and result in a "Victory" that creates more damage than a "Defeat" is another issue entirely. Over to you Angela.
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