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Q&A on Greece

On Sunday, 5 July, voters in Greece will head to the polls on an utterly unique referendum on a proposed bailout. The process is non binding, the question itself is strange, and the consequences of it are completely unknown.

What does any of it mean? The short answer is that Greece, and all of Europe, are in completely uncharted territory at this point. The five year crisis has gone from slow simmer to a full boil in the hot summer sun. Greece is calling Europe’s bluff, and Europe is not backing down.  The only thing we can be sure of is that there will be a resolution shortly, one way or the other. What exactly that means is itself completely up in the air as well.

Here are a few questions and answers on the Greek Crisis based on a variety of news sources.  Follow the links for more information in each question.

Alexis Tsipras, PM of Greece.

Alexis Tsipras, PM of Greece.

What is triggering this? There was a 30 June deadline for Greece to pay €1.6B to avoid default to the International Monetary Fund (IMF). The loans defaulted on total €240B. This is a new dimension to the crisis because we have never had an actual default before.

What will the IMF do with Greece in default? They can do whatever they want. These are bonds that are now in the hands of private investors who purchased them from the IMF. It is possible that the IMF will forgive or delay the payments, but the money has to come from somewhere for the debt holders to be satisfied. In essence, the credit line of the IMF is on the line as much as Greece’s. It’s up to them to risk that for Greece at this point.  They have not been given a good reason to do this yet.

Does this default mean Greece is kicked out of the Euro? Not at all. Nothing is automatic in this situation.

They didn't like having Germans tell them what to do in 1940, either.

They didn’t like having Germans tell them what to do in 1940, either.

What would kick Greece out of the Euro? Ahead of this deadline, there has been a run on Greek banks. They have been ordered closed for a week to prevent further withdrawals, with some modification to allow pensioners to withdraw €60 per day. When they re-open, a shortage of capital caused by more withdrawals would force Greece to “recapitalize” banks with new money so that the entire banking system does not fail. If they can’t borrow that money, they’ll print it – and call it the Drachma.

This is entirely about banks?  So far, yes.  Greece can vote to leave the Euro by making the Drachma their official currency whenever they want.  The European Union could remove Greece from the governing council that controls the Euro, but they can never stop them from using it if they want.  Greece cannot be “kicked out”.

Will we see the Drachma again?

Will we see the Drachma again?

What are Greeks voting on? There was a proposal on 25 June from the European Commission and the European Central Bank (ECB) that voters are being asked to either accept or reject. However, the proposals are very long and in English – and may not be valid after the IMF default.

Is the referendum binding? Not at all. But the government of Alexis Tsipras has said they will resign if “Yes” (pro ECB) wins.

How is the vote likely to go? Polls suggest that “Yes” will win, forcing a new political dimension to the crisis.

Why would Greece want its own currency? Keep in mind that they would still be members of the EU, meaning that goods and tourists can still go to Greece as if they were not crossing an international border. The would be like the UK, which has the Pound, except with better weather and food. A new Drachma could make Greece look very cheap and actually encourage tourism, manufacturing, and other things that will boost the economy. It also allows Greece to essentially start over with no debt if it’s willing to default on it, or at the very least renegotiate completely on its own terms.

Oooooouch!

Oooooouch!

Why would Greeks want to keep the Euro, then? It comes down to faith in their own government and the security of savings, especially for retired people on pensions. Any money they have in the bank will be subject to inflation if the Greek government decides to print too many Drachmas.

Will this trigger an international banking crisis? The short answer appears to be “no”, but it’s very unclear. Greek debt is not that large in the grand scheme of things. Some banks that either hold it or own credit default swaps (CDS) against it such as JP Morgan (JPM) will be in trouble. Their stocks are indeed down, but not a lot. Everyone has been preparing for this for a long time. It should be a relatively small event outside of the affect on Greek banks.  But if they default on the entire €360B in debt that they owe it would hurt a lot and may trigger failures in larger international banks.  It’s worth watching.

Should anyone outside of Greece care about this? It’s already hurting European stocks badly.  Beyond that, Europeans should hang their heads in shame if they can’t work this out, and it could reasonably force a lot of soul-searching on exactly what “European Union” really means. It will fuel the Euroskeptics, who have been gaining ground lately in many nations – especially the UK, which will hold a referendum on EU membership next year. But beyond that? It’s probably not anything to worry about.

So why is this dominating the news? European weakness is the genuine problem in the developed world right now, and it is the main reason that this depression is so hard to shake off in the US. The Euro is at $1.11 now, down about 19% in the last year. That makes exports to Europe, about 2% of our GDP, more expensive and slows growth in manufacturing. Until Europe gets its act together or the US finds new markets in the developing world to replace Europe they will be a drag.

Any more questions? Any better answers?

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22 thoughts on “Q&A on Greece

  1. Thanks for the good read! And a question: my wife and I have a vacation to the Northern Sporades planned for late this summer. Should we keep our plans? We were last in Greece in 2013, and found Athens in shambles (high unemployment, a lot of unhappy people), but the islands were clean and happy. Our flights this time only have us connecting through Athens, then off to vacation-land… any cause for concern?

    • I would guess that little has changed. It’s probably cheaper overall, especially if you are coming at this with US Dollars – the Euro is really in the trash right now and should only go lower.
      I would guess that if you bring lots of cash Euros you will be treated like royalty!

  2. Great article. I love your non, biased, journalistic approach. I personally put way too much opinion in my posts, so it is nice to have an objective source such as yours. BTW…I hope they vote no, because it seems they are being held hostage.

    • Thanks! I think there is plenty of room for the reader to make up their own mind on this. I have in the past expressed my support for Tsipras and the approach of finding a Greek way out of this – which is to say not just groveling at the feet of Germany and begging them for guidance. There has to be an element of growth for this to work, and that has to be a Greek plan. They can do it.
      However, in the short term there is a huge crisis that has to be passed to avoid a meltdown. I think Tsipras’ desire to take this to the wall has not been a good process at all and it has created damage. But that’s not the point right now – it’s about getting everyone through this to the other side. To me, that’s a very objective situation that requires definite action.

  3. I think everyone had time to prepare so this isn’t a big deal after all. It still begs the question as to how you make a new currency out of thin air. If it does come down to that I don’t see how it can possibly work.

    • I do not see how that deal is still on the table. And yes, it seems like a surrender – those polls that showed “yes” winning must have spooked them.

  4. The only thing messier is the aftermath of the Ottoman Empire.

    Istanbul was Constantinople…

    • As long as the EU doesn’t fall over this, it’ll be OK.
      You realize that buried in that €360B in debt is the roughly €15B tab for the 2004 Olympics – plus interest.

  5. I think you missed the two most important points to the Greek problem. The first is the EMU as run by Draghi at the ECB. Should Greece leave the euro and I suspect they well unless the ECB continues the ELA funds and I doubt they will, that meas some 130 billion in ELA funds/loans will disappear, the Greeks cannot and will not repay the money. Add to that the amount of Greek bonds held by the ECB and one starts to understand what’s at stake. The other EU nations must make up the shortage and the other PIGS will be hit heavily in their respective pocketbooks. This will put additional pressure on the other PIGS do pull out of the euro as well. If Greece only suffers briefly, say two or three years then it will be hard to keep even France in the Euro.

    The second part of this power play is that the EU as a super government is at risk. We tend to believe that the EU is just a trade group but it has morphed into a super government attempting to compel all EU countries to toe its line. If you have followed Nigel Farage over these many years you get a sense of the scope of the problem. The one stumbling block is that the French and The Germans have slightly opposing views about which comes first, subordination to the ECB or to the EU parliament. That Greece should “escape” its control speaks ill for the long run of the EU parliament control of the continent. It also opens the way for Spain, Portugal, Italy, and Ireland to seek the same path as Greece.

    Joining a trade union was the first step towards losing one’s innocence for that led to the creation of groups that legislated regulations and the need to cheat the regulators. But the real millstone was the creation of a common currency without and control over the issuance of national debt. The one factor that will destroy the EMU and the ECB along with the EU ill be the debt that Europe can no longer service. Add in the financial engineering stupidity of derivatives and it is game, set, match. Numbers don’t lie and math can’t be cheated.

    The largest industry in the Greek economy is shipping. Take a look at the Baltic Dry Shipping index and tell me what you see. The world is slipping into a recession if not a depression. Raw materials, agricultural goods, and container traffic are at very low volumes. Even crude oil is in a glut. That means the Greek economy must limp along as it is and hope that the injections from the Russian lease of one of two military bases and port facilities will help as will the building of a gas pipeline. The EU does not want this particular pipeline mostly for political reasons, but they will allow it because they need the natural gas. Greece will survive and still retain membership in the EU as a trade partner.

    Unfortunately the others such as Spain and Italy will not be so lucky in their attempts to do without the euro. The best they can hope to do is default on their loans and seek debt forgiveness. In doing so they will destroy both the EMU and the EU. This is the real problem. Should Greece actually benefit a little form going it alone, the whole superstructure of the EU will fall from its bloated weight. Europe will implode and the start of a long depression will begin. Whether it is Greece of simply the unsustainable debt that causes that crash really doesn’t matter. It’s like the man whose debts far outstrip his ability to service them. Greece is that flat tire on his car that keeps hip form getting to work and earning the money to try and keep the game going.

    • If I can summarize part of what you’re saying –
      “When you owe the bank a thousand dollars, you have a problem,
      But when you owe the bank a billion dollars, the bank has a problem.”
      🙂
      Yes, this is complicated for the EU. They really can’t “kick Greece out” of MU, but Greece can make them look bad. That’s why Tsipras thinks he has better cards, I guess. But the ECB just isn’t blinking – they appear to be made of Greek Marble.

  6. It’s a power play. Varoufakis knows the game is up for the EMU and the ECB as well as the EU parliament. For the EU creditors and the others it is a power play, make Greece toe their line. For Greece, the game is over, the EU and etc is out of options. If the creditors give in, they are doomed to give all the other debtors gifts. that destroys their position and they end up eating the debts. They end up losing the power to make the various other countries do as they command. Except it is all an illusion that that is what Greece is saying. It no longer matters what the ECB thinks, it no matters what the EMU thinks, it no longer matters what the EU Parliament thinks, it no matters what the Germans think. The debt has been ignored for far too long. It’s not the money per se, it’s that these debts cannot be repaid. The law of debt is that which cannot be repaid won’t. This is what the media and all the so-called experts miss. When you can’t repay the debt, the money is meaningless. Will Greece leave the euro? Will the ECB extend any more ELA funds? This is the real point of the problem. If the ECB blinks, they lose. If they hold their line, they lose. That is what Varoufakis is saying. That is the truth of the matter. And the math support his position.

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