When Greece faces its key creditors on Monday in a meeting that could roil global markets, watch out for the "b-word."
Greece's new government, led by the left-leaning Syriza party, was elected last month on a vow to end the country's €172-billion ($244-billion) bailout program. Greeks see a bailout as code for financial austerity, and a big part of Syriza's mandate is to reverse that austerity.
If other euro zone countries – Germany in particular – continue to use the radioactive "bailout" term at the meeting Monday, it's a good sign that Greece and the rest of the continent remain as far apart as ever. But if all the euro zone finance ministers start referring to an arrangement by some euphemism that doesn't start with a "b," chances are they're moving toward compromise.
Right now, though, that looks like a long shot. "At the risk of stating the bleeding obvious, things are not going very well," Jonathan Loynes of Capital Economics wrote in a note to clients.
In a worst case, a Greek exit or "Grexit" might lead to a chain reaction that would prompt other countries on Europe's periphery to leave the euro and destroy the common currency. More realistically, a prolonged period of uncertainty could spark a run on Greece's banks, drive down European stocks and deliver another body blow to a continent that is struggling to generate much growth at all.
A summit of euro zone finance ministers last week degenerated into finger pointing. Some participants told the Financial Times they thought Greece's finance minister, Yanis Varoufakis, had agreed to a final communiqué that suggested Athens was prepared to request an extension of its existing program. They say that Mr. Varoufakis then phoned Greece's new Prime Minister, Alexis Tsipras, and suddenly changed his mind.
The Greek government says it may have agreed to an earlier version but never gave the nod to the final statement. No matter who's right, it's clear that many euro zone negotiators are exasperated.
Part of the problem is that both of the major players in this clash have adopted positions that seem unusually self-serving.
In one corner is Greece, which insists the rest of the euro zone should be willing to take radical action to help ease Athens' massive debt burden – so long as that radical action stops short of requiring Greece to press ahead with reforms of its sclerotic labour market or persist with cuts to its massively overstaffed public service.
In the other corner is Germany, which argues austerity is good for the soul and even better for the European economy, despite a half decade of overwhelming evidence to the contrary. As the euro zone staggers along in a deflationary stupor, Berlin still insists it hears the footsteps of a vigorous recovery just around the corner.
One of the many odd things about the negotiation is that both sides want Greece to remain in the euro zone. Germany's motivation is simple: It wants Greece to repay its debt, rather than bolting for the door and defaulting. But Syriza has also ruled out an exit, probably because polls show more than 70 per cent of Greeks want to remain in the currency bloc.
"Greece could cause pain by seeking to unilaterally withdraw from the euro area, something the euro area would like to avoid," writes Jacob Funk Kirkegaard of the Peterson Institute for International Economics. "But burning down the euro area house to get its way in the belief that Greece's condition can't get worse is faulty logic."
He notes that Greece's membership in the euro zone has allowed it to achieve per capita GDP three times greater than nearby Bulgaria despite economic institutions that are, in many ways, inferior to its next-door neighbour. "Greek living standards have a lot further to fall if its leaders pursue irresponsible policies," he cautions.
Greece's mountain of debt, amounting to 175 per cent of its GDP, will probably never be paid back in full. But past negotiations have already lowered the interest rate to the point where Greece is currently paying less in debt service as a portion of its GDP than Portugal or Italy.
The likeliest outcome is still a negotiated deal that might tie debt reductions to progress on reform measures. But don't expect that to be achieved without more threats and posturing.
"The key sticking point in the negotiations continues to be Greece's refusal to accept anything that could be construed as a 'bailout,'" Mr. Loynes says. "This might suggest that the problem is largely one of presentation – the solution simply has to avoid the 'b-word' and look like a new arrangement."
Ian McGugan