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Tuesday, July 7, 2015

Greek Drama, Act II—Political Rhetoric

As investors around the world held their breath, last Sunday, 10 million Greeks delivered their resounding ‘No’ to their creditors’ demand for draconian austerity measures, which the jubilant Greek Prime Minister, Alexis Tsipras, merrily described as “a very brave choice.” He indeed set the ball in motion for fresh negotiations by complimenting the citizens thus: The mandate you gave me is not the mandate of a rupture with Europe, but a mandate to strengthen our negotiating position to seek a viable solution.”

And perhaps, not to fall behind, Jeroen Dijssebloem, Eurogroup President, criticized the verdict of the referendum thus: “This result is very regrettable for the future of Greece.” The whole drama that we have witnessed for the last two weeks, which engaged the attention of the European elite, strengthens my belief that ‘international economics’—no matter whether the country involved in being bailed out is a developed or developing one—is always more of politics than of any economics.

Before getting deep into that ‘economic-politics’, let us first take a quick look at Greece’s accumulation of mounting debt over the years that landed it in the present impasse. It is often claimed by the EU leaders that ever since Greek came out of its military rule in 1974, its  successive governments have rolled out social benefits—higher pensions, universally accessible healthcare, even salaries to orthodox priests, etc.—quite liberally running huge fiscal deficits year after year. With its traditional businesses such as shipping and tourism industries getting hit by cyclical recession, its trade deficit worsened further. And it became much worse once it joined Euro, for it could no longer devalue its currency to make its exports competitive and pay off the debt with a much devalued currency. As a result, its trade deficit and budget deficit shot up from 5% of GDP in 1999 to around 15% by 2008-09. Fearing that Greece may default on loan repayment, on May 2010, the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) extended a 110-billion euro bailout loan to cover its financial needs through June 2013 with conditions for implementation of austerity measures, structural reforms, and privatization of government assets to make its economy stabilize. This plight is continuing till date, due to which Greece today owes 323 billion euros to the IMF, ECB, and other creditors, which is more than 175% of its GDP. Over it, Greek is now seeking further assistance sans any more imposition of austerity measures.  

Against this hard reality, having secured the asked for ‘No’ from his citizens, Alexis Tsipras quickly moved into action to secure his position against the alleged move by Eurozone leaders to dislodge his left regime:  ensured support of the leaders from the main opposition parties to sign a joint statement to the effect that Greece desires to have a “socially just and economically sustainable agreement.”  Secondly, he replaced his hardnosed finance minister Varoufakis with Euclid Tsakalotos to represent Greece at the eurogroup meeting—all in an anxiety to send a conciliatory signal to the creditors.

Interestingly, on the other side, in Paris, German Chancellor Angela Merkel and French President François Hollande met to chart a common strategy to handle the fallout of referendum ahead of an emergency eurozone summit on Tuesday.  Nonetheless, Merkel, who is yet in no mood to offer debt reductions, was reported to have said that there is no current basis for negotiating with the Greek side and called on Tsipras to make new proposals to break the deadlock. One report also indicates that while France, Italy and Spain are pressing for a deal, Germany, EC and northern Europe seem to be cool about it. Then, coming to IMF, it has already indicated that its rules do not permit to lend fresh funds to a country that is already a defaulter of it.  The only blessing in disguise is that the Governing Council of the ECB decided to maintain the provision of emergency liquidity assistance (ELA) to Greek banks but against sufficient collateral, which means haircuts.

As Greek banks are running out of cash, and as the EU leaders are still groping in dark as to how to respond to the referendum that rejected the austerity terms imposed by them to retain Greece in the Euro, George Osborne, the British Chancellor, commented that “the prospects of a happy resolution of this crisis are rapidly diminishing.”

As all this is going on, there is yet another interesting scene enacted on the sidelines: Greece Prime minister is reportedly in touch with Putin, President of Russia exchanging views on the current situation in Greece. And this is being watched diligently by the US for any political mischief being brooded. Incidentally, it is also reported that US is working through France for a quick bailing out of Greece, lest Greece may move closer to Russia.

As the financial situation in Greece is thus deteriorating rapidly, no one has any clue as to what happens next. One guess is: Tsipras is likely to press for his old proposals—a new loan of 29 billion euro over a two-year period under the ESM permanent bailout mechanism along with a debt swap into a longer-term loan at cheaper rates. One counterargument against this could be that as there being no risk of contagion from Greece destabilizing the Euro, this merits no consideration. 

True, from a macroeconomic point of view, Greece is insignificant.  But one thing is certain: both—the EU-Creditors and Greeceneed to shed political rhetoric—“Germany being itself a beneficiary of debt relief once, cannot now preach about profligacy”: Germany (57 billion euro), followed by France (43 bn euro), Italy (38 bn euro), and Spain (25 bn euro), being the highest creditor of Greece has taken the hardest line calling for deadly austerity measures—and tread a path of give-and-take in a reconciliatory mood. Else, all will end up in peril. 


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