Greece: Game of chess over Greek debt commences

Finance minister and game theory expert Yanis Varoufakis makes first move in bid to restructure his country's debt burden

Finance minister and game theory expert Yanis Varoufakis makes first move in bid to restructure his country's debt burden

ANKARA – As well as being an economist, Greek Finance Minister Yanis Varoufakis is also an expert in game theory.

And his academic colleagues say he’s planning moves way ahead of the European leaders with whom he is trying to renegotiate Greece’s national debt.

“He is a brilliant intellectual leader,” commented University of Texas economist James Galbraith.

The new leftist government elected in January in Greece had originally promised to halt negotiations with private investors and the "Troika" of the IMF, European Central Bank and European Commission and demand a "haircut" from the nation's creditors.

But all that changed when Varoufakis joined up as finance minister at the end of last month.

The initial defiant statements from new Greek Prime Minister Alexis Tsipras, in which he threatened not to repay creditors, became more conciliatory and Varoufakis launched a European tour to work out an agreement.

On Sunday he met French Finance Minister Michel Sapin. On Monday he held talks with his UK counterpart John Osborne in London and on Tuesday he is to meet Italian President Matteo Renzi.

His maneuvering has already garnered the support of U.S. President Barack Obama.

In a television interview on Monday, Obama said with regard to Greece: “You cannot keep on squeezing countries that are in the midst of depression."

"At some point, there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits.”

- First daring move

But Varoufakis made a daring move on Monday, when he outlined a proposal to restructure his country’s public debt, which currently amounts to €321 billion ($363.6 billion) - the equivalent of 175 percent of Greece’s gross domestic product.

In an interview with the UK's Financial Times, Varoufakis proposed swapping existing bonds for instruments indexed to European growth or which would mature over a much longer period.

The European Central Bank currently holds €27 billion ($30.58 billion) of Greek public debt in bonds, while the IMF holds €32 billion of debt, the EU €53 billion and the Troika's joint European Financial Stability Facility has €141billion.

The part of the ECB holding which is in European rescue loans would be replaced by bonds indexed to European growth, meaning that higher or lower levels of gross domestic product would indicate increased or reduced interest rates on the bonds.

Bonds owned by the European Central bank would be replaced by what Varoufakis called “perpetual bonds,” meaning that they would have a long rate of maturity.

He told the Financial Times: "This would be a form of smart debt engineering that would replace proposals for a haircut or for a debt restructuring that the German government, among other creditors, has already declared unacceptable."

It’s not clear whether Varoufakis intends to stick with this proposal, or whether it is just the first move in what will clearly be a long and challenging chess match between Greece and its creditors.

- Germany plays hardball

The reaction to Varoufakis’ proposals has not been positive.

Germany, which seems more interested in playing hardball than chess, has already warned that no restructuring or haircut will be acceptable.

German Chancellor Angela Merkel said in an interview with the Hamburger Abendblatt on Jan. 31: "Europe will continue to show solidarity with Greece, as well as other countries especially impacted by the crisis, if they undertake their own reforms and savings efforts."

"There was already a voluntary waiver by private creditors - banks have already written off billions in Greek debt. I don’t see a further haircut,” she said.

Greek debt was restructured in 2012 when private creditors accepted a haircut of between 50 and 75 percent.

In the same year, the Troika supplied billion €240 billion in aid. The maturity of loans has since been reduced repeatedly.

But Europe now seems to have lost patience with the new Greek government’s attitude, as Tsipras and Varoufakis attempt to mend fences.

Tispras has pledged to seek a mutually beneficial agreement for Greece and Europe as a whole.

The Greek leader said Greece won’t act unilaterally and will respect its obligations to the ECB or the IMF - even though Tsipras still won’t negotiate with the Troika as a whole.

Varoufakis said during his trip to London: "Europe has to give us the financial space to make the necessary reforms."

"Otherwise, the country will be deformed, not reformed."

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