GREECE-WATCHERS BETTING ON a backdown from the anti-austerity Syriza government would have been sorely disappointed last week.
After five months of talks and increasingly tense negotiations, Prime Minister Alexis Tsipras’s administration announced it would send the decision on whether to accept a new bailout deal to a referendum on Sunday.
His announcement came after the government rejected tax hikes and budget cuts its creditors were demanding in exchange for what has become a €16 billion extension to the country’s bailout programme.
Yesterday the crisis deepened as banks were closed for the week and capital controls introduced to stop a flight of money out of the institutions.
The drastic move followed the European Central Bank pulling the plug on any extra emergency funding after the referendum was announced.
How did it come to this?
Despite election promises to ditch all dealings with the hated troika of lenders, Tsipras did a u-turn on that policy after only a few weeks in government.
Since then, Greece agreed a four-month extension on its €240 billion bailout after making some fairly vague promises on boosting tax compliance and improving efficiency in its economy.
However the crunch came last week when the cash-strapped country tried to strike a deal to unlock the last tranche of cash, refusing to sign off on measures its lenders were demanding in return for the money.
Greece’s sticking point on the creditors’ proposals, which leaked versions showed were little different to the ones Syriza had on the table, were cuts to the country’s pension system – something the left-wing government labelled a red-line issue.
Tsipras’s administration effectively drew a line in the sand, calling the bluff of lenders and other eurozone governments which were hoping he would back down.
Why are all the banks closed – and what’s this about capital controls?
Put simply, the Greek banks are shut because they’re in danger of running out of funds – an event which would trigger a complete collapse of the country’s financial system.
That has come because of the amount of “mattress money” already in Greece, where workers worried about losing their savings have had months to withdraw funds as the debt crisis worsened.
The capital controls mean the government has imposed strict rules on banks, limiting cash withdrawals on Greek bank cards to €60 per day – although people with foreign plastic can take out more, assuming the machines have any money to give.
The eurozone’s only prior experience with the last-ditch move came during 2013 in Cyprus, which ended up keeping some of the restrictions in place until April this year after its banks were brought back from the brink of disaster.
However the measures often fail – particularly in countries with loose controls that are easily sidestepped, or when too much money has already grown wings. In the case of Greece, some experts have warned the point of no return may have already passed.
But doesn’t the Greek government still need money, fast?
Absolutely. Without a new bailout deal in place, the country is about to miss its next debt repayment – €1.6 billion due to the IMF on Tuesday.
Failure to pay will technically put the country in default, although it’s possible the IMF will merely declare Greece behind on its payments to give it more time to sort out its finances.
But the IMF has also warned its part of the proposed new bailout deal would be invalid if the country falls into arrears because it couldn’t provide any more money under those conditions.
An even bigger crunch will come later in July when a big Greek bond worth €3.5 billion matures and the country faces a large-scale default on its debts, which would leave the government unable to borrow and force it out of the currency union before it drags the 18 other members with it.
Isn’t this crisis going to hurt the country even more?
It’s certainly not going to help, at least in the short term. With Greek banks closed and the stock market also shut, the country’s economy will be operating in crisis mode.
While it started to show some signs of growth last year, Greece slipped back into recession in May and this will likely get worse with confidence in the country’s business sector on the floor.
With the coffers empty there could also be a shortfall in government funding for its obligations – everything from paying public servants to filling contracts.
Then there is the impact on its vital tourism sector. Visitors have been warned to carry lots of cash if they are travelling to the country as, although their withdrawals shouldn’t be limited like those of Greeks, people have been reporting that they ATMs have already run dry.
What happens after the referendum?
Despite the risk, Tsipras has called on people to vote no at the referendum and knock back the bailout terms, adding it would be a “day of truth” for creditors when they learned Greece would “not surrender”.
Many see the country’s debt burden as already being unsustainable, leaving its government with little choice but to push for relief from the troika – or take the nuclear option of defaulting. Its debt-to-GDP ratio stands at over 175%, compared to a peak of about 125% in Ireland.
In Greece, the referendum is being pitched as a defacto vote on keeping the euro and staying within the EU, or leaving the union altogether – the so-called “Grexit”.
Should that happen, the country would be forced to set up its own currency – an event with no parallel in modern economies. The Greek government has already been secretly looking at what would happen if it brought back the drachma.
Any new currency would be expected to rapidly devalue against the euro because of the country’s weak economy, leaving those with money still in Greece dramatically poorer.
But in the long term it would give Greek finances the boost of making its exports cheaper and attracting tourists to what would be a more-affordable destination.
It would also give the government greater power to control its economy with the ability to set interest rates and even print money to prop up its budget – although that comes with the real risk of sending inflation snowballing out of control.
What does this all mean for Ireland?
As we reported before the Greek elections, a Grexit would carry some bad news for Ireland. Like other countries that bought into the euro project, there is the danger of contagion as investors lose faith in the future of the common currency.
Bond yields in southern European countries have spiked on the latest Greek crisis, pushing up the cost of borrowing and potentially driving down business investment.
But the flipside, if the euro continues its slide, is that Ireland’s export-dependent economy will get a competitiveness boost for its key trade to the US and UK.
There is also the small matter of the €350 million the Republic has lent Greece under the last bailout, an amount which the still heavily-indebted public finances can ill afford to lose.
And while on the whole the currency union is much better equipped to deal with another financial crisis now than when the last one struck, the biggest fear for eurozone finance ministers remains that a Grexit will mark a failure of the euro project.
That could give other deeply-indebted nations a get-out clause – particularly if the move proves a success for the Mediterranean country.
The Irish government has been looking at the implications for this country if Greece hits the exit button, although it has said the contagion effect would be minimal.
However should the most extreme scenario play out and there was a complete collapse of the euro – as feared during the last Greek debt crisis – Ireland faces a very rocky road in a return to the punt.
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