World

Greece votes NO; now what?

By J Brooks Spector 6 July 2015

The Greek population has spoken and decided overwhelmingly to support its prime minister in rejecting the bailout plan already withdrawn from the European financial troika. J. BROOKS SPECTOR takes a look at this fast-moving story and where things are headed.

If the initial results are accurate, Greece’s historic referendum has registered a substantial, even overwhelming 61% choosing the ‘no’ option. This was against accepting the terms offered by the European Union, the European Central Bank, and the European Commission to tighten the austerity screws even more to keep the international financial institution money tap open for the Greeks. Ostensibly, the referendum was over accepting or rejecting terms offered by the European troika to Greece (terms that had already been effectively rejected by the Greek government and had also already been withdrawn by the European negotiators in the wake of Greece’s failure to make its $1.72 billion payment due to the International Monetary Fund on 30 June). The result, seemingly, has empowered Alexis Tsipras’ Syriza Party government to carry out a new negotiations tack into an unclear future.

Technically, the question on the referendum ballot for Greek voters was, “Should the agreement plan submitted by the European Commission, the European Central Bank and the International Monetary Fund to the Eurogroup of 25 June, 2015, and comprised of two parts which make up their joint proposal, be accepted? The first document is titled ‘Reforms for the completion of the current programme and beyond’ and the second ‘Preliminary debt sustainability analysis’ ”. Voters were asked to reject or approve that rather murky question. And they seem to have overwhelmingly rejected it.

Implicitly, however, for many Greeks, the result could also be read as a kind of vote against staying within the eurozone, and instead, setting out on a new path – including, potentially, a relaunch of the country’s former currency, the drachma. Or something.

As The Economist described the situation a few days prior to the actual vote, “On the face of it Greece and its creditors were not far apart on the substance of how to extend the bail-out that the country needs to keep paying its bills. But trust between the two sides has broken down almost entirely, and room for manoeuvre has run out. On June 30th Greece failed to make a €1.55 billion ($1.72 billion) payment to the IMF, the biggest default in the fund’s history. Five years into the debt crisis, the country has suffered a loss of 25% of its GDP and a debilitating rise in immiseration and the unemployment rate – which now stands at over 50% among young people. Its soup kitchens are open but its banks are closed; the country is close to collapse. The default on its IMF loan does not have immediate consequences, but that would not be the case if it failed to make the payment of €3.5 billion due to the European Central Bank (ECB) on July 20th. Greece is likely to leave the euro, and possibly the EU, if it does not vote Yes on Sunday.”

The real problems coming from all this is that no one really knows what comes next. No one. Not Tsipras or his finance minister; not the head of the ECB or the EU commission head; and certainly none of the individual Greek citizens who went off to vote on the Sunday referendum. And anyone who does say he does know is engaging in the most wishful of thinking – or hopes or fears. About the only thing that is actually known is that the next major speed bump comes soon as Greece’s repayment to the ECB of billions of euros more that comes due in two weeks.

On the one hand, some have been arguing that this no vote means the Greek government is now in a stronger position to go back into the fray in a new round of negotiations to extract rather better terms from the EU, the ECB and the IMF (as well as individual governments and national and private banks), to keep those bailout funds coming. This would happen because these institutions will want to prevent the collapse of the Greek government and the country’s economy, and thereby prevent the ultimate collapse of the EU, the euro, and the ECB. Others are arguing, moreover, that the no vote will also put the pressure back onto the ECB when the Greek repayment to them of some $3.9 billion comes due on 20 July in order to prevent chaos in the European – and ultimately global – financial system from breaking out.

Yet others have argued a no vote will represent a model repudiation of all those misguided austerity policies, the remedies foisted on the Greeks over the past half-decade or so. These policies were designed to rein in government spending, thereby bringing its expenditures and revenues into better balance. These policies were pushed despite the evident need for more expenditures to pump prime a flat (or falling) economy – the Keynesian counter-cyclical prescription widely accepted since the Great Depression of the 1930s.

Moreover, the argument has been that the no vote will give the Greek government the essential freedom of movement to keep the threat of a Grexit alive. In other words, if the pressures on Greece become too severe, they can jump out of the euro, issue their own new drachma and allow its value to float to an appropriate level, thereby increasing hard currency revenues from exports or providing services paid in hard currency. Then negotiations over all that debt can proceed at a more leisurely pace and the terms of repayment can be constructed so that they don’t crush the fragile Greek economy.

On the other hand, at least at this point, it is just as easy to predict that this no vote will throw the Greek economy and financial system into even more chaos. Right now the country’s banks are largely shuttered as individuals can only draw a pittance per day from ATMs, and plans are only now coming on stream to sort out how to get at least some money into the hands of pensioners from these now-locked-down banks. Financial analysts add that the country’s banking system is already largely frozen into immobility in terms of loan origination for business operations, let alone expansion, unemployment is at least 25% already, and statisticians say the country’s GDP has fallen by a quarter in the past five years as well. With that frozen financial sector, none of these features of the Greek economy seem likely to improve any time soon, despite the Syriza government’s plan to renegotiate the terms of debt repayments.

Meanwhile, no vote supporters have also argued this approval to carry out a new round of negotiations means that eventually the EU, the ECB and all those other lenders will eventually fall in line and decide that a comprehensive rescheduling of the terms of Greece’s debt (or even a forgiving of portions of it) is in the larger interests of the borrower and the lenders both. Nobody, after all, so that argument goes, wants to precipitate the collapse of the Greek economy, generate a full-fledged default on all the country’s various international debts, as well as the contagion that could lead to the collapse of the entire eurozone project. And that would produce a cascade reaction spinning out from one country’s collapsing financial system on to other at-risk southern European economies like Portugal, Spain or even Italy.

However, even if that broader agreement is reached, it will take weeks – if not months – to get there formally. In the meantime, the world would have moved on, badly. It will almost certainly take weeks as the question of who takes the greatest pain from any comprehensive rescheduling is worked out, as no institution will want to be seen as the body that gave away the store under threat from a puny economy like Greece’s.

Beyond, that, of course, there will be the question of what kinds of pain the Greeks will have to endure, going forward, beyond that already being encountered. And in addition to that, there would necessarily remain the question of which systemic reforms will still be carried out – such as some major tax reform, yet further privatisation of government assets, or new taxes and/or yet more benefits cuts – once agreement on how to handle the vast amounts of money owed is painfully worked out and agreed to by all the participants.

Too many people have been easily portraying the current crisis as one of rapacious financial institutions seeking additional pounds of flesh from the poor Greek populace, all in order to set an example for other possible debt malingerers; but without recognising the complicity of the Greek government over the years in taking all that easy money without worrying too much about the future. This the Greek government seems to have done without doing the necessary sums, carrying out real reforms and cracking down on tax evasion, or even recognising what it is going to take to pay it all back somehow, some day, some way, far away.

And it is easy to forget that much of damage from any default or long rescheduling of that money owed will end up being paid for by taxpayers in better-managed economies like Germany. And that is a country that still seems almost constitutionally unable to accept what it sees as financial slovenliness. This, in turn, seems to be from a kind of folk memory of Weimar hyperinflation and the evaporation of its currency into nothingness. Most German analysts, commentators and politicians always seem to end up at that point, whenever the Greek crisis and the effects of a default comes up for debate.

At least initially, almost whatever happens in the short-run, the Greek population is going to go through a very rough wringer as their financial system and the economy generally runs into all this uncertainty. Tourism, a mainstay of the country’s economy, will be hammered as visitors fear the lack of ability to know how to pay their bills or whether the country will be in an uproar when they visit. Imports of necessary products, like medical supplies, foodstuffs and oil and gas will become increasingly difficult to do, as importers will find it harder and harder to secure the hard currency means to pay for them. And finally, the government will still need to sort out how it will pay its bills domestically and how it will be able to respond to those nearly inevitable price rises coming out of all this churning – even if Greece stays in the eurozone.

But if readers think this Greek mess is a unique one, it is not. The self-governing American commonwealth of Puerto Rico, an island in the Caribbean gained by the US in 1898 as a result of its victory in the Spanish American War, has managed to get itself into virtually the same nasty place as Greece has reached.

Upwardly spiralling government and quasi-government expenditures such as welfare and medical care plans, along with the costs of importation of petroleum and other energy costs for the island’s power needs, as well as growing government salaries and pensions have put the island’s government in a perilous space. As the New York Times reported, “Some of the debt was incurred in financing a health insurance system for the poor. Though the system was created in the 1990s, the government never identified a recurring funding source for it… Puerto Rico’s economy began contracting in 2006. Over time, the government started borrowing large sums to cover budget deficits and operating costs. That debt has doubled since 2008.” [Italics added]

The island’s government has now admitted it simply cannot pay off its indebtedness, let alone fully fund new expenditures going forward. And in a way somewhat akin to Greece, the lure of all this easy credit was too much to ignore and so they were hooked. As it happens, Puerto Rican debt instruments carried a major benefit – they were exempt from any taxes on earnings at the local institutional, island-wide or federal levels. As a result, they became enormously popular with bond purchasers like banks and investment funds for their good returns and lack of taxes on the results. This seduced successive Puerto Rican administrations to issue more bonds – until it has now become clear the island’s government can’t make the payments coming due.

Faced with resulting shrinkages of government services and the likelihood its business climate will continue to become worse than it already is, numbers of the island’s most productive residents – individual and corporate alike – are fleeing, or are contemplating such a move, to greener pastures. Puerto Rican residents are already American citizens and many have, over the years, moved to places like New York City. Now even more will do so – with estimates over 200,000 productive earners will make their move out of a population of 3.6 million. This will further erode its tax base, making a real solution even harder to achieve.

Like Greece, Puerto Rico is tied to the currency of a much larger market and economy – the island’s population is about a hundredth of the continental US, and its economy is even smaller, proportionally, with the share of its population below the official poverty line higher than in any state. But, unlike Greece, Puerto Rico has no real chance to break its ties with the US – and it will soon enough be going hat-in-hand to its creditors, even as it will be virtually impossible to achieve a bailout from the federal government, given the likelihood such a bailout would open a door other hard-pressed local governments in America would love to go through as well.

The problem of governments raising sufficient funds to cover current and future costs, or even when they decide to borrow judiciously to expand infrastructure at competitive rates, is becoming an increasingly disruptive feature of public life. The challenge is that no one is well versed to manage things when the process breaks down. Looking forward to the referendum, The Economist had argued two days before the vote, “There are Eurocrats who fear that Grexit might compound Europe’s migration problem. Over 63,000 migrants (mainly Syrians) have arrived in Greece this year; the EU relies on ‘frontline’ states like Greece to fingerprint and register as many such people as possible. This co-operation, never solid, could break down entirely.

“Geopolitical concerns loom large, too. For months some Europeans have feared that a Syriza-led government might seek to strengthen Greece’s long-standing ties with Russia. So far those fears have proved unfounded; Greece has not, for example, attempted to block the EU’s sanctions over Ukraine. But its calculus may change if it finds itself bankrupt and isolated. Mrs Merkel is one of those who fear the consequences of the EU abandoning a country with a history of coups in a part of Europe with a particularly unstable history. Some European institutions are already drawing up plans for humanitarian assistance packages for a post-Grexit Greece.

“And there could also be knock-on effects on Britain’s position in the EU. The more time and effort Europe’s leaders invested in the Greek crisis, however it develops, the less they will have available to deal with the renegotiation that is to preface Britain’s forthcoming referendum on EU membership. A chaotic Grexit would also strengthen the hand of British Eurosceptics by reflecting poorly on all involved; and if it accelerated fiscal integration among the 18 remaining members of the eurozone it would deepen British concerns about the gap between eurozone ‘ins’ and ‘outs’.

“To lose one EU member might look like misfortune; to lose two would look like carelessness. A Greek departure would surely make much of Europe more determined to keep Britain in. The problem is that, as Greece’s botched and blame-filled story shows, Europe is not adept at getting the results that it wants.” We shall now have a chance to find out soon enough, perhaps as early as when that massive ECB payment comes due. DM

Photo: Anarchists gather as the results of the referendum come in, in central in Athens, Greece, 05 July 2015. Greek voters in the referendum were asked whether the country should accept reform proposals made by its creditors. EPA/ARMANDO BABANI

Read more:

  • Despair and Anger as Puerto Ricans Cope With Debt Crisis at the New York Times
  • No’ has edge in too-close-to-call Greek voting at the Washington Post
  • Greece debt crisis: Polls close in bailout referendum at the BBC
  • Greece’s Next Challenge: Paying the European Central Bank
  • If July 20 payment is missed, ECB likely to cut off funds to Greek banks at the Wall Street Journal
  • The Greek crisis – There comes up a day at The Economist
  • Greece’s Debt Crisis Explained at the New York Times
  • Greeks Appear to Lean Toward Rejection of Bailout Deal at the New York Times
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