Story Of The Week

Why is Greece in trouble again?

Greece was always been at the centre of the Euro Crisis since it erupted in 2009. It was the first country to receive a bail-out, in May 2010. It was the subject of repeated debate over a possible departure from the single currency (the so-called Grexit) in 2011 and again in 2012. It is the only euro country whose official debt has been restructured. On December 29th the Greek parliament failed to elect a president, forcing an early snap election to be held on January 25th. The euro crisis is entering a new, highly dangerous phase, and once again Greece finds itself at the heart of it.

Global financial markets have gone into a spin this week following new speculation that Greece might exit the Eurozone. The reason for this is that the polls point to an election win for Syriza, the far-left populist party led by Alexis Tsipras. Although Mr Tsipras says he wants to keep Greece in the Euro, he also wants to abandon most of the conditions (which the “troika” of the European Union, European Central Bank and International Monetary Fund imposed in exchange for the 240 billion euros in bailout loans) attached to its bail-outs -ending austerity, reversing cuts in the minimum wage and in public spending, scrapping asset sales and seeking to repudiate much debt. Such a programme seems to sit uncomfortably with Greece’s continuing membership of the single currency. Syriza has left open the option of defaulting on the country’s massive debt.

The financial markets have also gone into a tizzy following Angel Markel’s comments. It all started when German magazine Der Spiegel reported that Chancellor Angela Merkel was ready to let Greece exit the eurozone in the event that the Syriza party wins the January 25 election and reverses the government’s austerity policies. The notion that EU leaders are so flustered by fears of Grexit that they would pay any price to avoid it was truer in 2011 and 2012 than it is now. During the euro crisis, Greece looked like the only country which might imminently leave the eurozone, but that crisis sent the cost of borrowing for countries like Spain, Italy and Portugal soaring too. There seemed to be a risk of contagion: If Greece left, why not other countries? The anti-contagion defences that the euro zone has since built make Grexit easier to contemplate. Much has been done to improve the euro’s architecture, with a new bail-out fund, the European Central Bank’s role as lender of last resort and a partial banking union. Moreover, most of the bailed-out and peripheral countries are at last growing again, and unemployment is starting to fall.

How a Greek Exit would pan out

French economist Alexandre Delaigue has sketched out the scenario that investors are worried about. “The negotiations between the new Greek government and the troika bog down. As a debt payment becomes due, Athens refuses to pay. That worries everyone, with Greeks rushing to withdraw their savings from banks fearing the country will exit the euro and investors withdraw their capital. Bled dry, Greek banks would likely appeal for urgent aid from the European Central Bank. “If the ECB sets conditions (for the government) and Syriza refuses, then suddenly euros issued by the Greek central bank cease to be the same as other euros,” which is a de facto Greek exit from the euro.

How a Greek Exit Could Impact the Eurozone

Germany appears willing to let Greece leave the EU, even as it has a lot of its money at stake in the debt recovery. But new questions would arise if Greece defaults on its debt. If  Greece does well, and starts to grow with a flexible exchange rate, then that can spell a lot of trouble for the eurozone. Other countries may decide that, ‘Greece did it and it is doing fine, so why don’t we also do it?  On the other hand, if the Greek economy does not do well after an exit, the eurozone will be much safer.

Most neutral observers do not see any way for Greece to repay its debt. The focus has to be on bringing down the debt level. Syriza wants to achieve that by negotiating a “restructuring,” which is similar to writing off a significant part of the debt. Much of the debt owed to the private sector has already been written off in previous restructuring exercises, and at stake is mostly money owed to the ECB, the EU and the IMF. If they win and are successful in writing of the debt and staying in the eurozone or leaving it, there are likely to be big contagion effects to other countries.

Most analysts still think Grexit seems unlikely and have a pretty optimistic view about Syriza becoming much more moderate and co-operative if they form the government, and suggest that European institutions will offer some relief. But that depends on both sides softening their current stances, something that’s not at all certain to happen.

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