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29-06-2015, 07:33 PM
Greece on the brink: the political fallout
BUSINESS SPECTATOR JUNE 29, 2015 2:29PM
Stephen Bartholomeusz
Business Spectator Columnist
Melbourne
There’s been a growing sense of inevitability about the shutting down of Greece’s banking system and the imposition of capital controls that occurred at the weekend as it became increasingly obvious that Greece’s Syriza-led government wasn’t going to accede to its creditors’ demands.
In the six months since Alexis Tsipras and his leftist party came to power with their anti-austerity platform, his hard line approach to the concessions demanded by the rest of Europe for its continued and increasing funding has produced a hardening of attitude from Greece’s creditors, which have already extended more than €240 billion in exchange for commitments to austerity that the Greeks reneged on.
The confrontational nature and, to a degree, the political naivety of the Tsipras approach, played badly in the rest of Europe and has created a wider political dimension to the financial crisis facing Greece.
It forced leaders elsewhere in the eurozone to factor in the domestic political implications of extending an open-ended bailout for Greece without some austerity concession in exchange. It would encourage leftist parties elsewhere to exploit the anti-austerity sentiment in southern Europe while delivering advantage to the far-right elements in Germany and France.
Even as he unveiled his latest stunt, a referendum on the latest bailout offer extended by the eurozone authorities (an offer that will expire ahead of the referendum), Tsipras was still fanning the flames.
“The dignity of the Greek people in the face of blackmail and injustice will send a message of hope and pride to all of Europe,” he said.
If Greece’s problems relate to its economy living well beyond its means in the lead up to the 2008 financial crisis, Syriza has failed to acknowledge that it has been demanding the rest of Europe to continue financing a standard of living beyond the capacity of the Greek economy, instead using the threat of a fracturing of the eurozone to try to do some blackmailing of its own.
Greece is now very definitely on the brink. Whether that involves a default on its debts (which are now mainly to the IMF and the Eurozone’s institutions) or a “Grexit” isn’t yet clear.
There could still be a “one minute to midnight” compromise, given that the closest payment deadline is a June 30 payment of €1.5 billion due to the IMF. Technically, if that payment weren’t made, it wouldn’t constitute a formal default. The more significant deadline is on July 20, when a €3.5bn payment to the European Central Bank is due.
In the meantime, however, Greece’s banking system has been shut and capital controls imposed. It may not have the cash to pay public servants and pensioners.
With more than €1bn a day of bank deposits flowing out of Greece in recent weeks and the European Central Bank capping its supply of emergency liquidity, there was no other realistic option but to freeze its banking system.
The longer the capital controls remain in place, however, they will increase the sense of crisis and add to the pressure on Greece to quit the eurozone in the absence of a speedy and successful re-engagement with the European institutions.
If Greece were to default on its obligations it wouldn’t necessarily lead to a Grexit, but Greece would have to contemplate introducing a new currency in tandem with the euro to remain technically within the eurozone.
In a Grexit, Greece’s banks would be deprived of external funding. The system would effectively collapse, with the remaining deposits drastically devalued; a reintroduced drachma would be savagely depreciated; inflation would soar; and Greece would be plunged further into recession or, indeed, into depression.
The reinstatement of its own currency would eventually allow the economy to adjust more quickly but Greece has such a narrow economic base that a Grexit, the loss of eurozone funding and severe currency depreciation aren’t likely to provide a pathway to any kind of prosperity.
There had been a lot of discussion and forecasting of what might happen if the negotiations between Greece and its eurozone creditors did break down. The consensus view has been that it would have only minimal impact on the rest of Europe, given the length of the period of forewarning Europe has had to ready itself for a breakdown.
That didn’t prevent a massive sell-off in the euro, even though private sector exposures to Greek debt, whether public or private, are modest, or ripples of volatility through global financial markets.
There will be some concern about financial contagion in the rest of Europe — in Portugal, Italy and Spain, for instance — but the rest of the eurozone would be far more concerned about keeping those countries within the fold than Greece. The direct channels between the banking and financial systems of Greece and the rest of Europe are limited.
There could, however, be short-term (at least) spikes in the yields on issues of sovereign debt by other southern European economies.
There is also a possibility, albeit a small one, that in a world increasingly nervous about the unintended consequences of the unconventional monetary policies being pursued by the key central banks, the uncertainties generated by the stand-off between Greece and the eurozone authorities could trigger some unforeseen and wider consequences of its own.
The longer-term issues generated by the Greek crisis, whether it is ultimately resolved through a compromise that keeps Greece within the eurozone or not, will be the potential for political contagion and the illustration it has provided of the structural fissures within a eurozone where the only real and binding commonality is the currency.
Nearly seven years since they were first exposed by the financial crisis, those fundamental flaws in the foundations of the eurozone are no closer to being properly addressed. They remain a source of continuing vulnerability, not just for Europe but for the global economy and financial system.
Business Spectator
BUSINESS SPECTATOR JUNE 29, 2015 2:29PM
Stephen Bartholomeusz
Business Spectator Columnist
Melbourne
There’s been a growing sense of inevitability about the shutting down of Greece’s banking system and the imposition of capital controls that occurred at the weekend as it became increasingly obvious that Greece’s Syriza-led government wasn’t going to accede to its creditors’ demands.
In the six months since Alexis Tsipras and his leftist party came to power with their anti-austerity platform, his hard line approach to the concessions demanded by the rest of Europe for its continued and increasing funding has produced a hardening of attitude from Greece’s creditors, which have already extended more than €240 billion in exchange for commitments to austerity that the Greeks reneged on.
The confrontational nature and, to a degree, the political naivety of the Tsipras approach, played badly in the rest of Europe and has created a wider political dimension to the financial crisis facing Greece.
It forced leaders elsewhere in the eurozone to factor in the domestic political implications of extending an open-ended bailout for Greece without some austerity concession in exchange. It would encourage leftist parties elsewhere to exploit the anti-austerity sentiment in southern Europe while delivering advantage to the far-right elements in Germany and France.
Even as he unveiled his latest stunt, a referendum on the latest bailout offer extended by the eurozone authorities (an offer that will expire ahead of the referendum), Tsipras was still fanning the flames.
“The dignity of the Greek people in the face of blackmail and injustice will send a message of hope and pride to all of Europe,” he said.
If Greece’s problems relate to its economy living well beyond its means in the lead up to the 2008 financial crisis, Syriza has failed to acknowledge that it has been demanding the rest of Europe to continue financing a standard of living beyond the capacity of the Greek economy, instead using the threat of a fracturing of the eurozone to try to do some blackmailing of its own.
Greece is now very definitely on the brink. Whether that involves a default on its debts (which are now mainly to the IMF and the Eurozone’s institutions) or a “Grexit” isn’t yet clear.
There could still be a “one minute to midnight” compromise, given that the closest payment deadline is a June 30 payment of €1.5 billion due to the IMF. Technically, if that payment weren’t made, it wouldn’t constitute a formal default. The more significant deadline is on July 20, when a €3.5bn payment to the European Central Bank is due.
In the meantime, however, Greece’s banking system has been shut and capital controls imposed. It may not have the cash to pay public servants and pensioners.
With more than €1bn a day of bank deposits flowing out of Greece in recent weeks and the European Central Bank capping its supply of emergency liquidity, there was no other realistic option but to freeze its banking system.
The longer the capital controls remain in place, however, they will increase the sense of crisis and add to the pressure on Greece to quit the eurozone in the absence of a speedy and successful re-engagement with the European institutions.
If Greece were to default on its obligations it wouldn’t necessarily lead to a Grexit, but Greece would have to contemplate introducing a new currency in tandem with the euro to remain technically within the eurozone.
In a Grexit, Greece’s banks would be deprived of external funding. The system would effectively collapse, with the remaining deposits drastically devalued; a reintroduced drachma would be savagely depreciated; inflation would soar; and Greece would be plunged further into recession or, indeed, into depression.
The reinstatement of its own currency would eventually allow the economy to adjust more quickly but Greece has such a narrow economic base that a Grexit, the loss of eurozone funding and severe currency depreciation aren’t likely to provide a pathway to any kind of prosperity.
There had been a lot of discussion and forecasting of what might happen if the negotiations between Greece and its eurozone creditors did break down. The consensus view has been that it would have only minimal impact on the rest of Europe, given the length of the period of forewarning Europe has had to ready itself for a breakdown.
That didn’t prevent a massive sell-off in the euro, even though private sector exposures to Greek debt, whether public or private, are modest, or ripples of volatility through global financial markets.
There will be some concern about financial contagion in the rest of Europe — in Portugal, Italy and Spain, for instance — but the rest of the eurozone would be far more concerned about keeping those countries within the fold than Greece. The direct channels between the banking and financial systems of Greece and the rest of Europe are limited.
There could, however, be short-term (at least) spikes in the yields on issues of sovereign debt by other southern European economies.
There is also a possibility, albeit a small one, that in a world increasingly nervous about the unintended consequences of the unconventional monetary policies being pursued by the key central banks, the uncertainties generated by the stand-off between Greece and the eurozone authorities could trigger some unforeseen and wider consequences of its own.
The longer-term issues generated by the Greek crisis, whether it is ultimately resolved through a compromise that keeps Greece within the eurozone or not, will be the potential for political contagion and the illustration it has provided of the structural fissures within a eurozone where the only real and binding commonality is the currency.
Nearly seven years since they were first exposed by the financial crisis, those fundamental flaws in the foundations of the eurozone are no closer to being properly addressed. They remain a source of continuing vulnerability, not just for Europe but for the global economy and financial system.
Business Spectator