Greece on decline

Today citizens of Greece are about to decide in a referendum whether to agree on conditions of yet another bail-out package and fend off looming full-blown bankruptcy or reject austerity measures that on one hand keep Greeks on their knees, but on the other prevent the country from falling off the edge of chaos. In the previous sentence I have mentioned a full-blown bankruptcy, by which I mean the government would be unable of meeting its basic obligations towards the citizens. If effecting payments of pension benefits and other allowances ceases and the whole public sector would grinds to a halt, Greece will plunge into total chaos. In fact, since a few days Greece is formally insolvent, but in economic terms it has been bankrupt for more than five years, though much work has been put in to cover it up.

Looking back in time, the Greek crisis has been in overdrive since April 2010. To make a good comparison, recall how much time has elapsed since the Smolensk plane crash. For such long period of time Greece functions only thanks to drip of money from creditors.

Two questions which ought to naturally come to mind are:

1) why has the ordeal lasted for half a decade and no one bothered to put Greece out of misery, while creditors of Greece patiently pump in more and more money to the effectively bankrupt country?

2) why over five years, despite generous aid from creditors, Greece has not managed to turn itself around?

You could mention political backdrop of the whole situation, willingness of key actors of the European politics to keep the eurozone together, since letting one country go would give others a free rein to walk away from the common currency. You could mention other reasons, such as fear of knock-on effect, etc., yet the story which deserves to be brought to your attention is about how the Greek debt changed hands. In 2010 and 2011 key creditors of Greece were German and French banks, through which Greek sovereign default would spill over onto the whole financial system of the EU. In the spring of 2012 Greece's bondholders agreed to lose 53.5% of face value of what they had lent to the Greek government (look at this, had Poland been written down 53.5% of its sovereign debt, its debt-to-GDP ratio would have stood well below 30% and Poland would have been one of the least indebted countries in the world). Thus most of the Greece’s debt was relieved and in the meantime transferred from the banking sector to the EBC and to the IMF. Private banks thus had to swallow some losses, yet recovered nearly 50% of what they had recklessly invested in Greek gilts and got rid of the junky securities.

Over five years of keeping head above water only thanks to continuously rolled over lending from international institutions, Greece has not gone ahead with structural reforms that would eradicate all the roots of their misery. Instead, it whiled away. It also has to be underlined austerity measures slowed economic growth in Greece and impaired the country’s ability to service debt. The cure has nearly killed the patient and made (lazy and economically illiterate) Greeks fed up with the fact their lenders have been dictating them what to do. The disgruntlement brought populists to power and after a few months of their rule, stance of Greece in negotiations with creditors has somewhat hardened.

The result of today’s referendum is anything but predictable. Greeks are strongly divided regarding the government’s refusal to further accept conditions set by lenders. The more rational part of society fears a scenario of banking sector’s collapse, which would mean loss of savings for those who have it and downfall of public finance system, which would mean public sector employees would not get their salaries and pensioners would not receive their benefits. I have no idea, what the other half think they will achieve by showing the middle finger to creditors and whether they realise how dire the consequences of being cut off from IMF’s and EBC’s money are.

Even assuming Greece is ousted from the Eurozone and all its debts are written off, the problems will not disappear. Greece would not be perceived credible by anyone (maybe except for Russia, which could lend to Greece to extend its sphere of influences), so no one would lend them (a liar) money. Greece would have make ends meet on its own, something the country accustomed to living beyond its means is not capable of. The situation is hence tragic enough that even pressing ‘reset’ button and letting Greece begin from scratch would not help.

Nevertheless, cognisant of consequences of Greece going insolvent, I do not commend of extending the misery of the country. Moreover, I believe far too much money has been injected into Greece, money that will never be recovered, therefore checking out and putting Greece out of misery in a controlled way would be the most reasonable solution.

What is going to happen tomorrow when results of the referendum unfold? If majority of voters back continuation of austerity program, the populist government will lose credibility and should step down. If majority of voters support showing the middle fingers to creditors, we will be watching history in the making.

Any lessons to learn?

Firstly – a common currency does not prove to be a good idea if area where it functions is insufficiently economically uniform (do not confuse with integrated). The benefits of one currency do not make up for lack of flexibility offered by having a domestic currency.

Secondly – letting populists grow into power does not seem to be the way to heal the ailing country…