Why Greece Could Now Tiptoe Toward a Deal

As the money runs out, the Greek Prime Minister Alexis Tsipras is starting to recognize that extend and pretend might not be such a bad strategy after all. Which rather leaves his finance minister, Yanis Varoufakis, out in the cold.

The Greek government reshuffled its bailout negotiating team, with the alternate foreign minister, Euclid Tsakalotos, taking over the new team and the finance ministry's chief economist leading talks in Brussels with the country's international creditors.

The frustrations Greece's creditors have with Mr. Varoufakis hit a pitch Friday when the latest Eurogroup meeting of eurozone finance ministers ended with no deal and plenty of recriminations. Mr. Varoufakis is seen as abrasive and confrontational. But most crucially, he's been resistant to agreeing to pursue the sort of sleight-of-hand deals that fail to acknowledge Greece's true economic position.

Greece, he's argued, can't pay its outstanding debts, which will need to be forgiven. And Greeks can't tolerate more of the same sort of austerity that has contributed to a fall in national output by more than a quarter since the start of the crisis.

His Syriza government might have been elected on a promise to end austerity and shed the country's onerous debt, but that doesn't wash with the country's creditors. Not least because northern European taxpayers already feel disgruntled about bailing Greece out and for fear that other struggling member states would demand equivalent terms.

Except Mr. Varoufakis is right. It is far-fetched that Greece could ever pay back its debts, which total around 175% of national output. And it's likely that demanding further austerity would just send the economy into yet another crippling recession.

Greece's creditors aren't economically ignorant. But they are professional politicians, which Mr. Varoufakis isn't--he's an academic economist specialized in game theory, which is a specialized analysis of negotiating tactics.

Academic economics demands that eggs be called eggs. Politics sometimes works better when they're called avian originated ovoid zygotic vessels.

Greece's eurozone peers know they can't forgive Greek debt. But outstanding Greek debt isn't really an economic issue right now. Notwithstanding the massive load, its impact on the Greek economy is relatively modest. After earlier debt forgiveness, maturity extensions and very favorable terms on its bailout loans, Greece's nominal interest costs in 2014 were, at 4.3% of GDP, lower than those of Italy or Portugal. And debt maturities could be extended ever further into the future so that one day, when conditions settle down, Greece's debts might well be quietly retired, when no one's looking.

What's more, the austerity Greece is kicking against is in part self-imposed to protect inefficient parts of its own economy. Greece's total spending on pensions was 17.5% of GDP in 2012, compared with 13.2% on average for the European Union. It's double that of some of the European Union's eastern European members with comparable economies.

Even so, Greece's creditors have offered concessions on austerity, making it clear they don't want to destroy the economy. Meanwhile, the European Central Bank has been propping up the Greek banking sector with ever rising infusions of emergency liquidity.

Mr. Varoufakis may not be politically minded. But Mr. Tsipras is. He'll have noted the polls that show three quarters of the population want to keep the euro. And he'll be aware that Greece holds a very poor hand in this particular game of high stakes poker. Efforts to extract even more from its creditors could well result in an angry and frustrated response that leaves Greece with no time and massive obligations.

The market's response to Monday's news of a reshuffle said much. Greek bond yields dropped sharply and its equities rallied.

A long term deal is by no means a nailed on certainty. But Greece might well be on its way to gaining a few months' grace to negotiate its next rescue package.