The final outcome of the Greek debt crisis has been obvious from the beginning. The Hellenic nation will need to restructure its debt, writing off a substantial portion of what it owes. It may need to leave the euro, allowing the country to devalue to regain competitiveness relative to its peers like Turkey. No one wants to acknowledge this inconvenient reality.
The meaningless referendum
Since the February 2015 ‘deal’, the parties had inched close to a new agreement in a prolonged battle of alternative drafts. On June 27, Greece’s Syriza-led government refused to commit to the latest terms presented by the creditors, choosing instead to call a referendum on July 5.
The referendum was a cynical exercise in political expediency rather than democracy. If this step was deemed necessary, it could have been called months ago when the position of the creditors had become very clear.
While the referendum required Greeks to simply vote yes or no, the questions were less intelligible. It was not clear whether the citizens were being asked to vote on the agreement, membership of the single currency, participation in the European Union itself, or all of these things.
The first question in the referendum was largely irrelevant as it was on a plan that had already lapsed. The EU had withdrawn its June 25 offer. With the expiry of the existing deals on June 30, there was no pact to extend. The second question on the International Monetary Fund (IMF) Debt Sustainability Analysis was on the projections of Greece’s ability to service its debt under different scenarios. It is certainly the first time, as one Greek observer noted, that a national referendum has been conducted about a spreadsheet.
The Greek referendum was always going to be a Rorschach inkblot test, with everybody projecting their own perceptions as the result.
The outcome was not a considered deliberation of the issues by a well-informed electorate exercising their democratic rights. It was influenced by the general confusion deliberately fomented by politicians. The ‘no’ vote ultimately reflected a reaction against European arrogance, illustrated by heavy-handed threats from several politicians and functionaries.
It is not clear what the ‘no’ vote signified, especially as both the Greek people and their government wanted to remain within the euro. The Syriza government argued that it allowed them to negotiate a new agreement on terms less onerous for Greece.
But if this was a win for the Hellenic people, then it is reminiscent of French philosopher Jean-Paul Sartre’s observation: “Once you hear the details of victory, it is hard to distinguish it from a defeat.” The troubles of the Greek people were always likely to intensify, not abate, as the nation had chosen to ignore several issues. With clinical efficiency, European creditors have exploited these to force Greece to capitulate to their demands.
One central issue is the weak Greek banking system.
Bank deposits have fallen by almost half as capital flees Greece. The immediate priority was reopening the closed banking system, which remains, as it has since late 2014, dependent upon funding from the European Central Bank (ECB). Without an increase in the Emergency Liquidity Assistance (ELA), currently frozen at €89 billion, the Greek banks cannot operate and are likely to run out of cash. An additional complication is that Greece was scheduled to make a €3.5-billion payment on a bond held by the ECB on July 20.
The ELA rules are helpfully vague, providing considerable scope for action. But if Greece defaults on its payments, it would become difficult for the ECB to continue assistance. The ECB tightened collateral requirements reducing the funding available to the Greek banking system to increase pressure on the Syriza government.
If the entire ELA was called in by the ECB, the Greek banking system would collapse. This would trigger losses for depositors as Greece’s deposit insurance scheme is underfunded. The country’s persistent desire to remain in the euro meant that it does not have the capacity to create the currency to recapitalise its banking system.
New deal worse than the old
The new agreement is on much more unfavourable terms than the one prior to the referendum. Even if it is sanctioned eventually, it cannot address the real issues.
The terms of the proposed “A-Greek-ment” (a lame creditor’s joke) includes a few concessions by the creditors, but almost total capitulation by the Greek government and a significant loss of sovereignty and independence for the Hellenic Republic.
The agreement commits Greece to a primary surplus (budget position before interest payments) of 1 percent in 2015, rising to 3.5 percent by 2018. There is disagreement about the mixture of spending cuts and tax increases to achieve these targets. The Greeks wanted selective tax increases. The creditors, especially the IMF, want cuts in spending. They consider business tax rates to be already too high and spending in areas like pensions to be unsustainable.
The new two- to three-year-programme will provide €82-86 billion in financing. Greece has commitments of around €5-10 billion each year plus the continuing need to roll over around €15 billion in short term treasury bills. This does not take into account additional funding needs of the state that may arise from budget shortfalls. Recapitalisation of the Greek banking system will need anywhere between €20 billion and €30 billion. Once immediate debt maturities (€12-15 billion) are covered, there is really no new money for Greece.
Debt repayments or relief are explicitly rejected with a vague reference to some re-profiling of debt in future. Greek demands for a debt writedown at the same time as they requested further funding were not favourably received by many creditors. Even if an agreement is reached, it is unlikely that it will result in a significant alleviation of the austerity programmes and hardships of ordinary Greeks.
The ability to meet plan commitments is affected by the state of the Greek economy, which has been crippled by lengthy negotiations, political uncertainty, capital flight, and the recently imposed banking restrictions and capital controls. The current economy, around 25 percent smaller than in 2007, is probably in recession and continuing to contract.
Bankruptcies have increased. Tax receipts have fallen, making budgetary targets difficult to meet. Delayed payments to suppliers and citizens cannot be continued indefinitely as a means to improve public finances.
Recent events may affect tourist traffic over the critical summer period, which may fall by up to 40 percent. Critical shortages due to capital controls have exacerbated pre-existing problems, reducing activity with further layoffs and closures.
The continued obsessive emphasis on budgets ignores the need for major structural reforms. Continuing membership of the euro restricts the ability of Greece to devalue. Further internal devaluation (lowering of costs) and structural changes, the only options, are difficult as well as punitive.
Many of the proposals under consideration are old. Promised proceeds from privatisations, reduced over time, have proved elusive. Proposals for higher taxes and pension contributions from companies require improved tax collection and reversal of tax amnesties. Successive Greek governments have proved poor at implementation. The creditors have sought to overcome this problem by insisting upon the reinstatement of the hated troika (the IMF, ECB and the EU) to oversee all Greek government actions. However, given the animus between Greece and its creditors, it is difficult to expect greater progress this time.
Quasi automatic spending cuts, which kick in if targets are missed, will ensure a continuation of Greece’s depression. If growth falls further with the continuation of austerity, the primary surplus objective will be missed, creating additional funding needs. Greece is also likely to miss targets and may require further funding or debt restructuring and write-offs in future. If this was an attempt to kick the can down the road, it is akin to kicking it up a slope ensuring that it will roll back onto you.
Political uncertainty remains. Greek Prime Minister Alexis Tsipras is vulnerable. The referendum was politically motivated, invoked to protect his increasingly beleaguered position: Tsipras is under attack from certain elements of his own party and coalition, who rejected austerity. His acquiescence to the draconian conditions even under duress, contradicting many elements of his own election mandate, is increasingly problematic.
It has exposed deep schisms within the Greek society. A divided population has consistently chosen the contradictory position of rejecting austerity and repayment of odious debt, while wanting to remain a part of the euro. This is based along socio-economic lines. The more affluent prefer to stay in the euro and enjoy European rights. The disadvantaged, including the old and the young, who have borne the bulk of the cost of austerity, are more open to leaving the single currency, which has not benefited them to the same extent.
Relationships between Greece and the rest of the Eurozone are now poisonous. The creditors and taxpayers in the Eurozone member-countries now face large losses on their commitments. Politicians who have repeatedly assured their citizens that the bailout commitments will not result in losses are now compromised. Italy and France as well as the troubled nations of Spain, Portugal and Ireland may find their fragile public finances exposed by the losses.
There is little sympathy for Greece, besides perhaps from France and the European Union (EU). The French government is concerned about the effect of a Greek exit on the political threat posed by the National Front. The EU is concerned primarily about the likely diminution of its power, should the European project fail. Italy and Slovakia have made it clear that they cannot support pension arrangements sought by Greece as they are better than those available to their own citizens.
There are strategic considerations. Stronger countries will need to decide how much more political will and money will be extended in support of the weaker members. This will shape German and northern European positions on further support for the peripheral countries. If these countries want to limit their large exposures, the viability of the European project weakens.
The creditors are also mindful of how events in Greece may affect elections in Portugal and Spain, due later in 2015. Concessions to Athens may encourage a further shift to anti-austerity parties, such as Spain’s Podemos, and a replay of the Greek crisis. There is no guarantee that the new agreement will succeed, as individual countries face domestic political difficulties.
Old Europe, old ways
A Greek default and departure from the single currency would tarnish the legacy of many policymakers and politicians, such as German Chancellor Angela Merkel.
It is simply delusional for the Greek people and their leaders to assume that other people will pay for their mistakes indefinitely. It is also delusional to assume that they can repeatedly renege on their obligations and remain members of the single currency and the Eurozone.
It is equally delusional for taxpayers and politicians in the creditor nations to pretend that they will ever be paid back. It is foolish to believe that more money and increasingly draconian measures, which now risk fomenting social and political disorder, will allow them to recover their investments.
Europe’s handling of the Greek crisis has revealed its inability to face up to the inconsistencies between a single currency, one monetary policy, national fiscal policies, national banking systems and the lack of political integration.
London’s The Daily Telegraph pithily summed up the ponderous decision-making process with five identical images dated 2011, 2012, 2013, 2014 and 2015. In each, a stern German Chancellor Angela Merkel tells various Greek prime ministers: “This is your last chance.” In the foreground, flowers wilt with the passage of time.
The festering problems will resurface sooner rather than later. Only this time, the amount at stake will be closer to €500 billion. Amusingly, the underlying working premise is that a country that cannot sustain €330 billion of debt can now pay back a much higher amount as its economy implodes further.
Whatever happens, it will destroy the lives, hopes and futures of many Europeans, in Greece and elsewhere.
(Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money)
(This story appears in the 07 August, 2015 issue of Forbes India. To visit our Archives, click here.)