The
Greek tragedy is gaining in momentum as yet another milestone passed with an
official debt default and
ominous signs the government coffers are empty.
Their PM has bailed out of
talks with the EU and IMF and called for a July 5th referendum,
seeking to convince voters a no vote against the EU proposals will strengthen
his hand in negotiating a better deal in exchange for additional bailout funds of
15.3 billion Euro. Unsurprisingly the referendum
has not impressed the EU and initially spooked global markets as the fear of a Greek
exit might lead to contagion to other weak links in the Euro zone and to banking
collapses. A Greek default would cause Greek banks into
bankruptcy and their losses would spill over and effect the solvency of European
banks, particularly those located in Germany and France, who hold about over €34
billion in Greek debt. But this is dwarfed by the governments of the euro zone who
are owed 184 billion.
The Greek PM is banking upon this fear in this high
stakes game of brinkmanship, thinking the EU will cave in and accept less
austere measures than are currently demanded.
Although his view has
gained some traction I would not be surprised if a yes vote carries the day and
the current government is even ousted from office.
Moving outside the
Euro zone a small player such as Greece is hardly going to make any impact so that
my concern would be for the local citizens whose savings and capital would be decimated.
At the time of writing, the Greek banks are all closed
and citizens are restricted to €60 to be taken out of an ATM at any one time. Whilst
emergency services are exempt as time runs on stocking and purchasing of goods will
become more difficult to further impact upon this beleaguered economy.
Bare in mind the Greek banks
were only currently able to operate because of ECB support amounting to cash
injections of 100 billion Euro. Now that Greece has defaulted on its €1.5
billion payment to the IMF, the bailout program has come to an end.
The interesting point is 70% of Greek citizens want
to remain in the Eurozone but only a smidge over 50% want to stay if it involves
accepting the current austerity package on offer. I think one could argue the
country would be better off accepting the current package and press on with
negotiation for some form of debt forgiveness in the longer term in relation to
the $320 billion owing. It is becoming increasingly obvious Greece is never
going to be able to repay the debt or even afford the interest bill and some
form of debt haircut will have to be negotiated for it to remain as a viable
member.
Whereas if Greece exited this would require a
reinstatement of the drachma, with the appealing prospect of ending the misery
of austerity measures. But this appeal would be short lived as reality sinks in,
for without any reserves, the only option would be to print more currency and allow
for a substantial devaluation to encourage exports and lower costs for tourists.
In the meantime the country would be plunged into poverty with a falling drachma
resulting in hyperinflation to decimate citizen’s savings and capital. In the
longer term recovery of sorts would emerge, but only after a prolonged period
of adjustment which would be extremely painful for its citizens.
Looking back
One might well ask how on earth Greece managed to
reach reach such a precarious position and what role the EU had in failing to
ensure to EU standards of performance were maintained.
Greece has suffered from very
poor governance stretching back many years where tax seems to have become an
optional extra.
But the seeds of this tragedy
had its nemesis in 2001, when Greece first adopted the Euro as its currency. The
beginning could not have had a less auspicious start as it initially was predicated
on hiding the excessive Greek debt levels to gain entry to the Euro Zone. The authorities entered
into a complicated transaction with the help of Goldman Sachs, which, according
to Bloomberg swapped debt issued by Greece in dollars and yen for euros using a
historical exchange rate, which implied a reduction in debt.
Upon entry to the Euro zone Greece then took
advantage of much lower interest rates and undertook extensive borrowing and investment
so that its debt continued to rapidly rise, to continue to operate well outside
its obligations under the Maastrict Criteria. Greece later confirmed it had not
been initially truthful, about the extent of its borrowings, but the EU decided
it must defend its member nation to ensure she did not default or leave the
Eurozone. Furthermore as both France and Germany were also spending above the
limit it was felt it would be unfair to impose sanctions on Greece so the EU opted
to allow the nation time to implement their own austerity measures.
The extent of the black hole became clearly visible
in 2009 when Greece’s budget deficit stood at 12.9% of GDP, against a maximum
of 3% allowed under the treaty. In response Greece announced an austerity
package designed to ensure deficit were reduced to 3% of GDP in just two years.
Subsequently the EU and IMF provided €240 billion in emergency funds to facilitate
support as the nation made the transition to be self-sufficient.
But at this stage the austerity measures began to
bite with evidence of widespread civil unrest and pockets of rioting in the
streets as the economy slowed and unemployment ratcheted up to 25%.
In
2011 a Euro 190 billion from the stability fund was added to existing bailouts as Greece's debt to GDP rocketed to
175% of GDP.
The position was dire but some relief was granted
as Bondholders finally agreed to debt forgiveness by exchanging $77 billion in
bonds for a debt now worth 75% less.
Since then Greece has made some progress in
reducing the size of budget deficits but not the amount it owes.
Conclusion
Either way the future does not look bright, but if integrity
is given a chance, there still is the possibility of compromise being reached. Personally
I think a yes vote is what is needed and less brinkmanship and a more pragmatic
approach to allow for some considerable debt forgiveness as part of an overall package
is in the best interest of all parties.