The Drachma and the Euro: Greece 2015

Octavian Report: How do you see the crisis in Greece playing out? Do you think it ultimately ends with Greece leaving the euro?

Daniel Speckhard: A year ago I was predicting a 20-25% chance of a Greek exit. Now I see a 50% chance of a Greek exit. It's gotten much higher.

I think what we saw with Greece is it was not yet really that mature. It's done a good job of managing in a very, very difficult period. But at the same time it's moving fairly slowly at addressing some of the fundamental challenges of the financial sector. I believe in large part it's been carried through this on the back of the European Central Bank.

If the European economy were doing better, if there weren't challenges in other peripheral states, I would perhaps be more optimistic. And the politics of Greece has only gotten worse. They're on their third government since 2009. They're lasting an average of two to two-and-a-half years. We've gone through the center-left government. That one was destroyed by what it tried to do. PASOK at a high point had a little over 40 percent of the national vote. Now it's under essentially five percent. That's a party that's been around for decades.

Then we moved to the center-right. That party took the reins and actually for the first time had to govern in a coalition. That's the first time that the Greeks have had a coalition government. And now we are with a radical-left government, though even Syriza is a coalition of several different far left parties. This is a party that has never governed before so it has no experience in governance. It has a constituency which has very high expectations and demands for how it's going to act towards European creditors.

I'm fairly pessimistic, even though they were successful in a short term extension of the bailout , that in the medium or longer term that there's a sustainable way for Greece to thread the needle of ending austerity and ending the hardship on its people and still meeting the demands of responsibilities to its creditors and to the euro group.

That constituency has two parts: a very radical element that's made up of a lot of far left socialists and communists and even some anarchists. It has also a more stable central group of former leftists, what we would call socialists here in the United States, but who are sort of center-left for Europe. These people can no longer bear the austerity that they feel has been imposed on them by the European troika. It has, in their minds, been responsible for devastating the economy.

Now, I'd argue that this is the result of having lived beyond their means for so many years, that it's their own policies that led them to this point and the realization that no more new external flows were coming in to support the level of spending they had in the past. But for them it feels like this is essentially being imposed on them from the outside. And you have to be sympathetic when you actually visit Greece and see the number of people who have fallen below the poverty line, the number of people who are unemployed -- 50 percent of young people -- and the significant dramatic drop in family income throughout the country. There's real hardship going on, and it's not surprising it's creating a political pushback allowing this far left party to succeed in the last elections.

I think perhaps some people and observers have been a little surprised that the new government was so accommodating on some of the issues that were pressed by the euro group and the eurozone, that they're able to allow the bailout to continue, that the measures they're going to propose will be overseen by the Troika.

I think what that reflects, however, is that in spite of the new government pushing hard they were met with intransigence on the side of the European creditors, and so they took what they could get: essentially that they could be the ones to come up with the measures, but no release from the bailout or Troika oversight initially. I think what they're doing is buying time. That once they get some more time they hope to put together a much more robust program of social welfare that will be offset by proposed tax collections.

I think also that the euro group was very happy that they could find a way to extend this program for another four months so they can give everybody a little more time for cooler heads to prevail.

OR: Do you think they would be able to execute real tax collection in Greece?

Speckhard: Greeks are very good at tax evasion. They've been doing this for a very long time and you can bet that people with the money have sent a lot of it overseas and that the easy stuff has already been done by past governments.

OR: Do you see them continuing also to back off on the privatizations?

Speckhard: I think what you'll see is that they won't necessarily reverse the privatizations that are already well along, but I don't think you should expect to see any significant additional privatizations.

OR: Do you think that they are no longer pushing for a reduction in debt and that it's more about the primary surplus reduction?

Speckhard: I'm sure they'll take another run at getting the debt reduced, but they need to solve the financial situation. The debt is not the issue in the short run: they've already done a fairly significant restructuring of the debt that allows for significant grace periods and a fairly long-term repayment. Everybody already understood, even before we came into this current crisis, that people were going to have to look at the debt level again. Then there are a lot of economists that will tell you, whether you smooth it out or not, it's not a good thing for the country to have a debt overhang of 175% of GDP. And I do think, had we not had the election, that would be the discussion right now. If they had been able to keep the program roughly on track you would have seen the previous government talking now about how you adjust the outstanding debt load.