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Greek crisis: NSA phone tap of Angela Merkel reveals she knew Greece's debt was unsustainable

What are you going to do?
What are you going to do?
Sean Gallup/Getty Images

Back in 2011, before the most recent reorganization of Greek debt, German Chancellor Angela Merkel told her personal assistant that Greece's debts would still be unsustainable under the terms of the new arrangement unless it received more generous assistance from Germany and other wealthier European countries.

That's according to this National Security Agency intercept of her communications, revealed to the world by Wikileaks:

This is one of these things that's going to be treated as a bombshell by some, and as "everyone already knew this" by others. Understanding why some will scream and others roll their eyes helps explain some important aspects of the situation.

Greece's debt isn't about money

Greece's debts really are unsustainable. This is just basically not a debatable point. The reason it's not genuinely shocking to hear that Merkel privately admitted this is that nobody really disputes it. Greece's creditors know that they aren't going to be paid back. But they want the debt to stay on the books anyway.

Why?

Well because as long as the debt is on the books, Greece needs to keep asking for permission to roll the debt over and failure to pay debts can be used as a political trigger for forcing Greece out of the Eurozone. The debt, in other words, isn't about money. It's about political control. If the debt is formally forgiven then not only do Greece's creditors need to write down some money, but they need to let Greece go on its merry way. If the debt is merely subjected to repeated rounds of extend and pretend then Greece's creditors get to keep making various demands about structural reform.

It's not, in other words, that Europe wants Greece to reform in order to get its money back. It's that Europe wants Greece to remain formally on the hook for its debts as a tool to get Greece to reform.

The case for outrage

That's what "everyone knows" about the situation, and it's what "everyone" knew last week, last month, and last year. European Union bureaucrats will tell you, the Greek government is well-aware, and it's all-in-all not exactly a big secret.

But this is kind of like how "everyone" knew that the link between Saddam Hussein and 9/11 was about altering US risk-tolerance rather than about direct operational ties. Nobody told the American voting public! In fact, they were told just the opposite to keep the whole project viable.

By the same token, the stories that are being told to the population not just of Greece but also of Finland, Germany, Austria, the Netherlands, etc. are not that Greece's debt is a symbolic and legal token of political control whose purpose is to allow Greece to be governed by experts at the European Central Bank rather than elected officials in Athens. They are being told that Greece's debt represents real monetary value that is owed to Northern Europe's taxpayers, and that whether or not they get their money back is a huge point of contention.

Greeks do it too

The flipside of this is that Greek politicians have been engaged in their own version of this same misleading dance. They tend to present their requests for debt forgiveness in terms of a technical analysis of what is sustainable and realistic, the way a bankrupt company might negotiate with its creditors.

But a bankruptcy agreement is legally enforceable. For Europe, the existence of the debt and Greece's period need to refinance, is the enforcement mechanism. If Europe and Greece make a deal that makes the debt go away, then there's nothing to hold Greece to the rest of the deal. So when Greek negotiators demand debt reduction they're really asking for weaker enforceability not a financial adjustment.