Greece at the crossroads

This could be the weekend that would decide everything for Eurozone, Greece and other nations on the Eurozone periphery which are themselves drowning in the debt.

World is facing many crises like Syria, ISIS, Ukraine, Iran nuclear deal, tensions in South China sea, global warming etc. But one crisis that has hogged all the attention and is bringing jitters to the world financial markets – in spite of assurances of numerous economists and financial experts - is the Greek debt crisis and Greek referendum this weekend.

The referendum is basically revolving around one simple question: Whether to accept the bailout deal as proposed by the Troika – IMF, European Central Bank and the European Commission – which contains sharp austerity measures. The measures include steep VAT hike and the drastic reduction in the public pensions.  On the other hand, Greece is demanding more leeway in how it raises its tax revenues and no cuts to pensions.

For Greece the choice could not be starker.

Though the financial collapse of 2008 impacted economies around the world adversely, the main reason for the Greece debt lies in the structural imbalance in its economy in the form of high debt-to-GDP ratio.

The implosion of the Greek economy in 2009 led to fear among investors that it would not be able to meet its debt obligation. Greece was, thus, unable to borrow on the international markets and had to turn to “troika” – International Monetary Fund, European Central Bank and European Commission – to seek the bailout to avoid the impending financial crisis.

But the bailout did not come cheaply. Too many strings were attached to it by troika: public sector pensions were supposed to be reduced, tax receipts were to be streamlined by curbing tax evasions, steep VAT hikes were required to be implemented to generate more tax revenue, and deep budget cuts to social programs were to be put in place.

The result of these austerity measures was the absolute impoverishment of the population which was already suffering under the hardships due to recession. The further deterioration in the living standards led to resentment among the population and resulted in the resounding victory of anti-austerity Syriza party in January which campaigned on the promise of ending painful bailout agreement.

The two sides – EU and Greek government led by Syriza – are now at loggerheads. The diametrically opposite proposals regarding the debt deal has led to an impasse. Greece – which is already on the verge of bankruptcy - has already missed June 30th deadline for the repayment of the loan to IMF, thereby becoming the first developed nation to default on the IMF loan. What dominoes would fall as a result of this default, nobody knows.  

Despite all the confident talk coming from the finance ministers of EU member nations, there is an underline fear running through European nations: nobody knows how the Greek banking sector collapse would impact the banking sector in other EU countries, especially the weaker peripheral nations who are themselves teetering on the edge of abyss due to high debt and poor economy. Prime examples are Portugal, Italy, Ireland, and Spain etc. – the nations belonging to the so-called PIIGS group.

This is driving the markets and the central banks all over the world nervous: How to prevent the contagion from spreading if Greek economy and banking system collapses?

The mood of both EU and Syriza has hardened towards each other, given the inability of both EU and Syriza to budge from their respective positions. Even though Greek Prime Minister Tsipras has now sent letter to EU accepting lenders’ conditions but with modifications, the letter seems to be ‘too little too late’ as the deadline for agreeing to new debt deal has already expired.

EU, on its part, has taken note of the letter but has decided to stick to its gun and is waiting for the outcome of the referendum and has refrained from commenting on the contents of the letter.

As there is no debt deal to talk about, July 5th’s referendum has become moot. The referendum would be seen as nothing but a referendum on whether to stay in EU or not.

Here is the most important thing: What would happen with either “yes” or “no” vote?

A “yes” vote means agreeing to all the conditions stipulated by the troika: more VAT hike and reduction in public pensions, which would bring more misery to the already suffering and impoverished population.

Internet is full of news reports of Greeks not being able to buy medicines, food etc. and committing suicides. The unemployment situation is even bleak. There are no good paying jobs for the educated youth for whom the future looks bleak with many of them turning towards drugs.

A “yes” vote would pile on more misery and Greece would have no hope of ever recovering from the economic disaster that plagues it.

A “yes” vote means it would not matter which government would come to power year after year, it will be Brussels and Germany who would be calling all the shots regarding what policies Greek government is supposed to implement – not for the benefit of Greek people but for the benefit of Brussels and Germany.

Greek would, thus, lose all the sovereignty and would be reduced to perpetual “serfdom” or “vassalage”. It would be quite ironic for a country that gave the world principles of democracy to be reduced to such a status.

To top it all - as recently leaked IMF report suggests - Greece would need a debt reduction of 30% if it ever hopes to recover from the debt crisis. It would take at least a middle of this century if Greece ever manages to climb out of the hole it finds itself in.

A ‘yes” vote seems akin to committing national suicide but given the turnout of the “yes” camp rally at the Olympic stadium on Friday – which boasted of having more than 10,000 people according to some news reports – it seems quite strange that there are people who are willing to agree to the demands of the troika for the sake of relieving the current pains but are oblivious to the darkness that would engulf them in the long run.

On the other hand, a “no” vote means complete chaos as Greece would be booted out of Euro; its banking system would collapse and it might have to go back to its old currency – Drachma – which would be absolutely devalued. Short term pains would be excruciating but in the long run, Greek economy would recover, given the fact that the devalued drachma would make exports more competitive.

And, in the event Greece is forced out of EU due to its “NEIN Frau Merkel” vote, there is always a possibility that it could tap the newly commissioned BRICS Bank or AIIB (Asian Infrastructure Investment Bank) for funding not in Dollars, Euros but in Yuan. Not only this would free the Greeks from the bondage of troika but the absence of punishing conditions could help Greece recover from the economic disaster it finds itself in. What this would entail in terms of geo-politics – NATO, EU etc. - is beyond the scope of this article, but the idea that BRICS Bank or AIIB could become a factor in helping Greece stand back on its feet is tantalizing, akin to earthquake of magnitude 9.0+.

How the scenario develops would depend on Sunday’s vote. A “yes” vote means perpetual serfdom and a “no” vote means a new beginning with sovereignty remaining intact.

Many nations, like France, Italy, Austria, Spain, Portugal etc., are eagerly looking forward to see which path Greece takes as their future also depends on it. The bankers of western world are rooting for a “yes” vote, while those yearning to be free from the shackles of institutions like IMF, ECB etc. are rooting for the “no” vote.

The birthplace of democracy is thus truly at the crossroads. And, so is the Eurozone. The world waits.