Greece: Living on a slippery slope

As the Greek economy is poised to fall into a technical default on its international financial obligations, and as Prime Minister Alex Tsipras is scheduling a referendum on accepting or rejecting the bailout conditions, J. BROOKS SPECTOR tries to suss out what it means and where it may be going.

Put yourself in the shoes of Greece. Over the past five years, you and your family have been borrowing a whole lot of money for the past several years to keep up appearances, and now the dreadful moment to pay it all back seems to have arrived – with a vengeance. The debt collectors are calling on the phone and banging on the doors.

The problem is that your big, extended family has been losing work, and so some of them haven’t been paying their share, even as they have started to take up much of the house for their own private projects. Meanwhile, still others have been doing private deals with others’ money. And everybody wanted to have everything they saw in the shops.

And so now your family has been to Mr Scrooge who works down the road to beg him to allow the family to borrow yet more money to pay off some of those previous debts. And this is all while the family has scheduled a big indaba around the kitchen table to decide what in the world to do next.

Suddenly the whole thing is beginning to sound rather too much like Mr Micawber’s infamous advice to young Mr Copperfield (as recorded by Charles Dickens), when he had said, “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” For some, this is Greece’s predicament.

By the time readers read this, it is possible Greece will have been told publicly that it is – at least technically – in default to the IMF for a big, whopping splodge of money that was borrowed earlier. This will have come, when, after looking all through the cupboards, the Greeks have found there simply wasn’t $1.8 billion and some change to make a payment to the IMF that came due at the end of June. How did it all go so horribly wrong, what has it meant for the Greeks – and what may it mean for the Greeks – and everyone else – going forward?

In evaluating the current crisis, the Economist says, “By any reckoning today is a crucial moment in the extraordinary Greek debt-crisis drama. With multiple deadlines looming, Alexis Tsipras, the Greek prime minister, seems to be seeking a way out of the mess he created on Friday, when he announced his intention to put Europe’s latest offer to a referendum vote. With its current bail-out programme—the second Greece has received—scheduled to expire at midnight in Brussels, Mr Tsipras has officially asked for a third rescue package: which would cover Greece’s financing needs for the next two years and include new debt restructuring. Yet time is quickly running out to conclude a new deal.”

Or, as Washington-based Brookings Institution international finance researcher Douglas Elliott argued a few days earlier, “Let’s be frank: we are all guessing right now when we project the future of the high-stakes negotiations between Greece and the rest of Europe. My crystal ball blew a fuse and completely failed to predict that Prime Minister Tsipras would call a referendum in Greece for next Sunday, requesting support for rejection of the current European proposals. Judging by the commentary, it caught virtually everyone else by surprise, too. This is both an illustration of the difficulty of predictions in this fraught situation and is a game changer in its own right that makes the immediate future even murkier.”

In a similar vein, Daniel Altman, writing in Foreign Policy echoed Elliott, saying, “Plenty of people will tell you what is going to happen with Greece in the coming week. The truth is, no one knows for sure. And that’s exactly the problem — with no rules to go by, the financial system is at the mercy of personalities, politics, and posturing.”

For starters, it should be recognised that when Greece joined the euro zone, it largely surrendered much of its economic and financial policy control to that common currency. In simple terms, for example, historically, it has been more usual for the economic managers of countries in economic trouble to allow their respective currencies to slide against other, stronger currencies.

The general idea was (at least per economic theory) that this gave their home industries a way to gain competitiveness against foreign competitors on a comparative cost basis and the revenues from exports earning hard currency would, when translated back into that depreciated currency, provide more local income into the economy. Moreover, home-based industries like tourism and financial back-office and call-centre operations could become much more competitive because their relative labour costs would fall and tourist accommodations and related services would become a better bargain. But after joining the euro, for Greece, such an approach to economic travail essentially has vanished.

As to how things then entered this increasingly sorry space, the New York Times explained, “Greece became the epicenter of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances. Suddenly, Greece was shut out from borrowing in the financial markets.

“By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis. To avert calamity, the so-called troika — the International Monetary Fund, the European Central Bank and the European Commission — issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at today’s exchange rates. The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.”

But, if Greece gained that cash for bailouts, why has everything ended in such a muddle? The initial theory was that this money would help the country buy time to stabilise its financial affairs under the required austerity plan and thereby settle market worries that the euro zone itself might collapse as a result. But Greece’s economy has actually shrivelled by around 25% in the past half-decade and unemployment is now above a quarter of the working population (Does this sound at all familiar to South Africans?). Part of Greece’s problem is that the bailout money actually was used to pay off yet earlier international loans Greece had secured, rather than entering the Greek economy as “pump priming” for growth. Without economic growth, the country has simply been unable to manage its crushing current debt load.

Greece’s appetite for borrowing grew as well, even as local revenues did not. The usual prescriptions for the austerity diet were to allow income and spending to come into balance. The government was to sell off or privatise unproductive government assets, cut benefits, salaries, pensions and related payments, and rein in new government programs. But tax revenues didn’t rise, in part because many Greeks and Greek businesses had developed tax avoidance (and even outright evasion) to a high art. The austerity program simply exacerbated that tendency among the Greeks and so the country has now needed two major bailouts. In the final minutes before the IMF payment has come due, it has now formally requested a third such payment, linked to plans to help finance the country’s government for the next two years.

Concurrently, Greek Prime Minister Alexis Tsipras has suddenly called for a national referendum on 5 July on whether the nation will accept the stringent terms now being proffered by its international creditors. The most recent opinion polls seem to indicate that the at this point the Greeks narrowly favour reaching a deal with the EU, even if that would lead to painful concessions. Moreover, a majority are supporting the retention of the euro as the currency. But, analysts also say many people are still having trouble making up their minds.

The Brookings’ Elliott says, “We know that the broad majority of the Greeks want the country to stay in the euro zone while also gaining significant changes to the austerity and structural reforms previously agreed with the Europeans. The problem is that these two desires are at least somewhat contradictory, given what Greece’s European partners are demanding in exchange for the financial support that is likely necessary to enable Greece to stay in the currency zone.” So, how to get there is now a black box in the centre of Greek politics.

In terms of the actual referendum, The Financial Times has reported it will be a basic “yes” or “no” question, with “no” placed above “yes”. The question to be voted upon will read: “Should the draft agreement submitted by the EC, ECB, IMF at the Eurogroup on June 25 which consists of two parts that make up their full proposal be accepted? The first document is titled ‘Reforms for the completion of the current program and beyond’ and the second ‘Preliminary debt sustainability analysis.’ ”

Still, some analysts say that being late on this now-due IMF payment will not necessarily put the country into a highly visible, formal default, as opposed to being a more squishy soft “in arrears” condition. But not handing over that check or sending an EFT would become the latest evidence Greece will progressively be unable to meet yet other obligations that are coming due in the near future to various international bond holders as well as the European Central Bank. And that, in turn, could well make the European Central Bank increasingly less interested in making the kind of emergency loans that have been propping up the nation’s banking system for weeks already.

And so, what does happen next? Aside from a dipstick test of Greek opinion, would other financial angels – such as China or Russia – conceivably step forward for geopolitical reasons, if the IMF, the ECB or yet other national banks decline to do so? No one knows.
Even after a technical arrears status for Greece’s IMF loan takes hold, the really crucial red line may be a due bill to the ECB for 3.5 billion euros that comes up later in the month. If they can’t make that payment, would the doctors standing around the operating table finally turn off life support for the struggling Greek banking system? And then what happens? Again, no one knows.

Finance specialists say that most investors, whether they are international banks or other foreign investors, have already divested themselves of Greek bonds or other financial exposure in Greece. As a result, they have become increasingly less and less vulnerable to a Greek implosion. And other weak sisters in the euro zone like Portugal, Ireland and Spain have taken steps to make their less vulnerable to a spreading infection. Moreover, the ECB has built up its stock of euro zone government bonds and has promised to purchase more of those should it become necessary, thereby rendering most of the European governments less subject to market whims than might have been the case some years earlier.

Nevertheless, Greece remains tied into the global financial system and some difficult tendrils may not come into view until there is an actual default or there are actual bank failures. That means, simply put, no one really knows for sure what would happen in the worst case. Ouch.
And so, in a few days, as the Greek citizenry is about to the polls again to accept or reject the terms on the table from euro zone creditors – terms Tsipras has already called unacceptable – The New York Times could comment, “So far, the creditors have refused to grant an extension of the current bailout program beyond Tuesday. Without that extension, Greece has no chance to receive the €7.2 billion remaining in the current program. (The conditions under which Greece might get that money are what the months of fighting have been about.) Any arrangement with Greece after the referendum would, as a legal matter, require new negotiations and a new program.” And if that happens, the pushing and shoving gets to start all over again, even as the Greek population continues to take it on the chin in their increasingly straitened lives.

While the Greek banking community still seems to be solvent, at least on paper, actual lending has ground to a halt, thereby slowing to a near-standstill the crucial role of banks in financing business activities and growth. The Times went on to note, “On Sunday, the European Central Bank capped its emergency credit line for Greek banks at €89 billion. Most if not all of that money has already been used to cover withdrawals by customers, and there is virtually no money available for new loans.” Another ouch.

While the Greek banks may yet open their doors next week after having been shuttered by government decree, but it is very unlikely they will be operating normally for a while. Meanwhile, international news television channels and print stories have been filled with the stories of Greeks being unable to withdraw more than modest sums (60 euros or $67) per day from ATMs clear across the country. Capital controls announced on Sunday mean Greek banks and markets will remain mostly closed until the coming week. Greece’s Finance Ministry had announced banks would be able to open about a thousand branches on Wednesday to allow retirees who do not hold bankcards to withdraw limited amounts of cash, but the government is still sorting out details of its capital controls in what seems to be an ad hoc basis. This has been adding to the confusion of Greek daily life.

For comparison’s sake, after the collapse of Cyprus’ banking system back in 2013, it took two years for that government to reverse restrictions on bank transfers – and Cyprus already had a euro zone bailout plan in place. Greece will not be in that position and Greece has not yet put into practice European rules that can govern an orderly winding down of banks that have gone bust.

So, in the midst of all this, the debate is back on the table about that potential Grexit from the euro zone. The “apocalypse is coming” crowd has shifted ground somewhat, now that the rest of the region has more safeguards (or so they say) to hold back contagion from Greece’s departure from the common currency. Some are arguing the Greece itself might just be better off with a significantly devalued own currency and a government that isn’t always going cap in hand to one or another international financial institution for just one more shot at redemption.
In response, The New York Times argues, “Others say that’s too simplistic a view. Despite the frustration of endless negotiations, European political leaders see a united Europe as an imperative. At the same time, they still haven’t fixed some of the biggest shortcomings of the Eurozone’s structure by creating a more federal-style system of transferring money as needed among members — the way the United States does among its various states. Exiting the euro currency union and the European Union would also involve a legal minefield that no country has yet ventured to cross. There are also no provisions for departure, voluntary or forced, from the euro currency union. Investors may also still be betting that Greece will reach a deal with creditors before or after the referendum, particularly because polls indicate the majority of Greeks favor sticking with the euro.”

In the election earlier this year, the leftist Syriza party came into power, promising its citizens it would renegotiate the terms of the increasingly hated bailout. Alex Tsipras, the new prime minister, had initially said that the austerity regimen had created a “humanitarian crisis” in Greece. That is fine a good for the Greek politicians, but the country’s increasingly unhappy creditors, most especially Germany, have insisted it was Greece’s fault for poorly carrying out the economic measures that were part of the bailout agreement. Accordingly, the creditors don’t want to change those rules – perhaps out of a fear that doing such for Greece will open the door for more efforts whenever the next country has troubles.

And so where has all this left the increasingly battered Greek citizenry? Largely, it seems, they are left in the soup. With the banks closed, people have been clustering in front of closed doors, somehow wondering when they will be able to access any savings, salaries and pensions. Not surprisingly, a kind of siege mentality has come in, at least for those with some money or a viable credit card. Petrol stations are starting to run dry and people are drawing down supplies in groceries as quickly as they can, just as they might do ahead of an imminent natural disaster like a vast hurricane. All the while, as the banking system contracts further and any money they still have seems spinning out of their reach, Greeks are starting to say they fear the country is now on an uncontrollable slide out of the modern electronic financial and banking world.

Brookings’ Elliott argues, going forward, “We know that there is a middle ground to which the Greeks and their European creditors could move which would allow all the relevant governments to claim at least partial victory. The broad outline of such a deal has been visible for months and the proposals of both Greece and its European creditors are already in an area that could be accepted by the other side under the right circumstances. It therefore remains quite likely – although far from certain – that the two sides will eventually find reluctant agreement, albeit with considerable further economic and political pain possible before they get there. Greece’s banks are closed this week, and ATM withdrawals limited to 60 euros a day, which will hurt the economy and provide a foretaste of the pain that will grow the longer an agreement is postponed.”

Similarly to not knowing precisely what the effects of failure to reach agreement with the ECB, there is the question of what, exactly, Tsipras will do if he loses the referendum, Elliott argues. Conceivably he could call new parliamentary elections and have his party gain seats, given its continuing popularity from the prime minister’s stance of “standing up for Greece” against all those mysterious international financial institutions – and, of course, Germany. A new election and a bigger Syriza majority might well lead to a further standoff in the financial negotiations – or, conceivably, it might lead to a stronger government with the momentum to aim for a new deal if some way could be cobbled together to give everyone a sense of winning.

Elliott writes, “Alternatively, the prime minister could hold the government together and go back to the negotiating table and agree on a deal with the Europeans, based on the express will of the people to accept something similar to what is already on the table. It is unclear whether he would be weakened by the electoral rebuff or strengthened by the ability to ‘stand up for Greece’ while accepting the people’s will for a compromise. The vote would presumably reduce pressures from his left wing for a while, in any event. Another possibility is that Tsipras brings in a national unity government to implement the voters’ will. The latter seems less likely to me, except as an interim step towards a new election.”

Ultimately, perhaps, the biggest unknowns are whether Greece would eventually leave the euro and just how much negative economic impact would happen globally from such an exit. Elliott notes, “Business and consumer confidence will be damaged, stock markets will decline at least modestly, and interest rates in the other European countries that are perceived as relatively weak, such as Portugal and Spain, will likely rise in comparison to German rates as money flows to ‘safe havens.’ ” And the fall in the value of the euro might possibly help the European economy vis-à-vis the American one, as European exports gain slightly from its weaker currency value. Further, with an actual Grexit, that country would most likely face a sharp, sudden recession in the face of the sudden uncertainty, even if the longer-term prospect might be some modest help coming from the new, weaker drachma.

Whatever ultimately comes from negotiations that take place post-midnight 30 June, and then, after the now-scheduled referendum, and then from the results of what comes out of this referendum, one thing is clear. The international financial community, the euro zone, and the Greek economy are all about to enter into some uncharted waters. DM

Photo: Protesters supporting a ‘Yes’ to the referendum and demanding Greece to remain in the Eurozone rally outside the Greek Parliament in Athens, Greece, 30 June 2015. The signs read ‘Yes’ in Greek. European leaders have made a last-minute offer to Greek Prime Minister Alexis Tsipras in a bid to solve his country’s bailout crisis, which has reached fever pitch after Tsipras on 26 June unexpectedly called for a referendum on the terms of a bailout deal, putting an abrupt end to the aid negotiations and leading to a cap on Greek emergency bank loans and forcing Athens into capital controls. Greek voters will decide in a referendum whether their government should accept an economic reform package put forth by Greece’s creditors. EPA/SIMELA PANTZARTZI

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