Last week, Greece became the first developed country to default on the IMF.
Greece’s debt is 180 per cent of its GDP. Most of this debt, it will never pay back. To give you a sense of scale, Greece owes more than €90 billion to Germany alone. It owes around €70 billion to France, slightly over €61 billion to Italy. The key reason Greece owes so much to its official creditors is because nine of every ten euro lent to Greece in 2010 went to pay back debt that should have been restructured then.
Today the Greek people are being asked to vote on a deal with the troika which expired earlier this week, right about the same time as they defaulted.
A yes vote would see prime minister Alexis Tsipras and his government resign, a national unity government of some kind formed, and, with enough bowing and scraping, a new deal to copper-fasten Greece’s current misery will be done, but Greece will stay in the eurozone. A vote for no leaves Tsipras in power, and sends him back to the negotiating table armed with a popular rejection of austerity and, most likely, a popular agreement to leave the euro.
As the no campaign moves towards its final days, the relentlessly populist Syriza is in the process of demonising the very institutions it will be asking for money if it succeeds.
Agencies like the IMF are in the process of damage limitation, but of their reputations rather than the situation. The IMF failed spectacularly behind closed doors to help the European Commission and the European Central Bank understand that Greece needs large-scale debt forgiveness. They have now chosen, in the middle of the referendum campaign, to publish their research that found – who knew? – Greece will never pay its debt and needs a massive debt write down. The IMF intervention will do little except salve damaged consciences in Washington.
Meanwhile, on the floors of the parliaments of Europe, leaders are banging on in escalating tones of severity about a ‘no’ vote implying the wish of the Greek people to leave the euro. They have decided to play the fear card someone, it seems, always has to play in referendums, hoping for the ejection of Tsipras’s government and the election of a newer, more compliant negotiating partner.
There are actually four sides to this story. Obviously, the Greek government versus the troika, backed by 17 other member state governments, including, shamefully, ours. There are ‘the markets’, and finally, the rest of the world. The nations of the world seem happy enough to help decide the outcome of the referendum for the Greek people. The creditor nations of the euro are getting more and more alarmist in their language about what a no vote means to them, in part because of the political contagion which might result in their own countries, should Syriza win again.
But what does a no vote really mean to each nation, individually? A no vote, which is about 50:50 according to the latest Greek opinion poll, leaves the creditor nations and much of the rest of the world in a bad spot, despite all their assurances to the contrary. Their economies can’t handle the extra uncertainty, and their banks are not as insulated as they think. Cheaper exports would appear to make a weak euro a good thing for a small open economy like Ireland’s, but another currency crisis could put Irish necks on the block. That will weigh heavily on policymakers’ minds.
The Greek government is hanging on by its fingernails. My guess is that history will not forget its incompetence in negotiating a compromise without breaking its banking system. However, it will look like a saint beside Greece’s creditor countries, which managed to take a wealthy sovereign nation in a balance of payments crisis and turn it into a society on the brink of collapse, without a banking and payment system, as well as basic commodities.
The resilience of the Greek people in all of this is remarkable, but their patience with the existing institutional set-up may be at an end.
For a small country like Ireland, Greece leaving the euro would affect us in several ways. Basic trade relations would be changed in the event of the rollout of a new currency, which would happen if they default on a €3.5 billion payment to the ECB on July 20. Greece would have to be prepared to have a currency that does not depend on Europe supplying euro to run its payment systems. That will be quite a shock, but I think after a year or so, people outside Greece would not notice. For that year people inside Greece would definitely notice. It is not an exaggeration to say a Greek euro exit will scar a generation.
In 2012, Greece exported about €30 million worth of goods and services to Ireland. Some examples of what we buy from them: around 11 per cent of all exported goods and services from Greece to Ireland was medicine, 6 per cent was cheese, 4 per cent polishes and creams, 5 per cent synthetic woven fabrics, and another 6 per cent was, wait for it, oscilloscopes. Things Ireland needs, but that we can probably get elsewhere should the need arise. Ireland is not going under if our supply of Greek oscilloscopes goes wallop.
Our banks, on the other hand, are part of a highly connected system of inter-bank lending and borrowing. This funding went south in 2008, and while the ECB can now supply masses of liquidity to the system through its quantitative easing programme, Irish banks will not be immune if other larger banks take a hit.
Individual Irish businesses will be harmed by any economic changes, especially in the transition between currency regimes, but they should be able to recover. A negative market reaction to the institutions of the euro having hundreds of billions of euro reneged upon in one go might well spread to Ireland.
The new currency would fall in value against the euro, which would harm Irish exports to Greece. Inflation would soar there under its new currency, and some of that inflation might ‘leak’ into Ireland, but much of the domestic economy in Greece would be vaporised. Whether Greek banks, currently closed and under capital controls, could actually survive in this environment is debatable.
And yet despite all these potentially life-altering events, the average Greek person surveyed is 50:50 on whether to decide to vote yes or no. This tells you precisely how bad things are there, thanks in no small part to the incompetence of the troika and the creditor nations.