Europe can’t force Greece into never-default land

Page last updated at 04:30 GMT, Thursday, February 2, 2012 - 09:30 EST

Reuters Blogs:

By Neil Unmack

A German proposal to tie Greece’s future with a pledge to never default looks barmy. The euro zone already has a hard enough time getting Greece to reform its economy, partly because Greece can wield the threat of a messy default. When Athens reaches a primary budget surplus, as it should this year, it will be in an even stronger negotiating position because it could then default on bailout loans and still pay for the government’s expenses.
Germany has come up with the idea of forcing Greece to prioritise international debt repayment over domestic bills. The euro zone would then be assured it would get its money back. This in turn would make it more credible in pressuring Greece into speedier reforms, since the Greeks themselves would feel the pain of non-compliance.

In a way, the German proposals are already a reality. Greece is delaying payment on 6.5 billion euros of domestic bills, such as payments to civil servants, while honouring, so far, its obligations to international creditors.

But there is a limit to how far the Greeks can subordinate themselves to foreign lenders. And there seems to be little legal basis for prioritising international creditors. Even if Greece were to pass a law enshrining the obligation to service debts above all other payments in its constitution – as Germany seems to wish – nothing could stop the Greek parliament from changing the law later on.

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