Why Greece’s Negotiators Can’t Afford to Ignore Spain Now

Time is running out for Greece. Its government needs to strike a deal with the country’s creditors sometime in the coming few days if Greece isn’t to default on the next payment to the International Monetary Fund, due in early June.

And as if this turn of events isn’t dramatic enough, the result of Spain’s municipal and regional elections held on Sunday ratchet the tension up that little bit further. There, the ruling People’s Party was battered by upstarts, not least the anti-austerity Podemos party, Spain’s version of Greece’s Syriza.

If the Syriza government manages a favorable settlement with its creditors, pressure is bound to grow in Spain and other eurozone economies that suffered most heavily from the crisis and that have struggled for growth since for similar treatment.

Which puts Greece’s eurozone creditors in a bind. Fail to give enough ground and Greece will default on its obligations–even the most willing Greek government would be stuck on how to raise the necessary funds to pay the debts falling due over the coming weeks in light of a weak economy and struggles with raising the necessary taxes. But give too much and extending terms to other member economies quickly becomes economically untenable. Its eurozone neighbors could absorb a big write down of Greek debt, but they wouldn’t be able to do the same for Spain or Italy.

The irony here is that Spain’s anti-austerity party has gained strength even though the Spanish government has been running substantial deficits. Indeed, the European Commission forecast that once cyclical factors are excluded, the Spanish government’s shortfall will actually grow this year and next from where it was in 2014. And while the Commission’s most recent forecasts show Spain running a cyclically adjusted deficit of 2.5% of GDP this year, Greece was seen producing a 1.0% surplus (though this will undoubtedly be revised down).

Spain’s eurozone partners have been fairly accommodating of the country’s very large official sector shortfalls–and the fact that the government has frequently overshot even those generous targets. Spanish austerity has been nowhere near the belt tightening demanded of Greece.

Which is to say, there’s certainly ground for Greece’s creditors to give. But perhaps less than Greeks would like to believe. Thanks to European Central Bank liquidity, the wider eurozone economy could reasonably expect to weather a Greek default. By the same token, Greece’s creditors would be able to forgive Greece a large slice of its debts.

But whether the likes of Germany and other core countries would be willing to bear a Spanish or Italian restructuring is another matter entirely. And offering up a Greek rescue as a precedent could just embolden the Syriza-type movements elsewhere in the single currency region.

(Πηγή: blogs.wsj.com)