A Greek tragedy – Act II

S. Madhusudhana Rao

The world had a sigh of relief on Wednesday. For 24 hours, from Wall Street to Dalal Street and Europe to Asia, people working in different time zones had watched the unfolding drama in Greece: Would it default on loan repayment running into billions and risk an economic collapse or seek another bailout and work on a rescue package with international lenders?

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S. Madhusudhana Rao

As the clock ticked, markets went into a tizzy amidst frantic efforts by European Union and Eurozone officials. The global brouhaha subsided when Athens let the June 30 repayment deadline pass with a last-minute request to European Stability Mechanism (ESM that handles euro crises)  to work out a two-year rescue deal that includes restructuring of debt.

Why the world in general and Europe in particular is concerned about Greek economic crisis? There are two main reasons: One, in a globally networked trade, political, economic or any other crisis in one country will automatically hit others; two, Greece is a member of European common currency union called Eurozone and if a member state is in dire straits its troubles can have a cascading effect on others and their currency euro. To avert a catastrophe, EU is eager to bail-out Athens. In a way, that is a blessing in disguise for countries like Greece which will not be allowed to sink in a bottomless pit. A long rope will be on hand for rescue.

Probably, the Greek government headed by Prime Minister Alexis Tsipras knows it and wants to gauge his people’s reaction to another bailout package/deal before committing himself to it. As Europe was pressing Greece for debt repayment arrangement before expiry of the deadline, Tsipras had announced a referendum next Sunday on the bailout deal. There is no official word on whether the referendum is still on or cancelled in view of the request made to ESM. Nevertheless, the Prime Minister had called on the people before the zero hour to reject the EU-IMF rescue proposal. In the changed scenario, a referendum is redundant.

In the coming days, officials will be working on ways of rescheduling Greece’s debts and means of increasing state revenue to reduce the budgetary gap between collections and spending. It’s a herculean task, considering the fact that Greece’s loan burden is Himalayan. Look at the following figures:

Athens owes IMF about 30 billion euros of which 1.6 billion euros (about $1.7 billion) had to be paid as installment by June 30. Greece also borrowed nearly $480 billion from European countries through European Central Bank and contingency funds. The two countries that have the maximum exposure to Greece debt are Germany and France which together account for $255 billion. Some British banks also have lent a few billions to Athens.

So, Greeks and their government have been carrying mountains of debt burden on their shoulders without the know and means of unloading it. The country’s mainstay is tourism and it alone can’t sustain a country’s growth. A sluggish economy, unemployment, labour unrest, political crises have added more woes to Greece. In fact, most of its troubles started with the 2008-09 global meltdown and since then old and new problems have been haunting Greeks. The country has never been able to go into a recovery mode despite massive external borrowings. The first rescue package came in 2010 when the economy was tottering and another one two years later. Neither had helped Athens to pull itself out of an abyss.

There was criticism, of course, that these bailout deals have hurt Greece more than rescuing it. Prescriptions for ailing economies include tax hikes, welfare cuts, removal of subsidies, etc. which make any government unpopular. They can also lead to political instability, social unrest and labour protests that will ultimately hurt the country’s economy and growth. Greece is no exception.

For now, Greece has bought time, allowing its partners in Eurozone and EU breathe easy. Otherwise, they were on tenterhooks, fearing that Greece’s loan repayment problems would lead to that country’s exit from Eurozone. Should it happen, it will set a dangerous precedent and poses an existential risk to Eurozone.

Eurozone is basically a monetary union of countries that have adopted euro as the common currency of member states. From January 1, 1999, eleven countries in Europe had started using euro as their currency. A year later, Greece joined Eurozone giving up its own currency drachma.

Since then, Greek marriage with euro has been under strain. In fact, debates have been raging over the concept and practicality of using a common currency – whether it is euro or something else, say rupee for SAARC — when there are strong and weak economies. Germany and France are economic giants whereas other countries like Greece are pigmies. Common currency critics aver small economies with no large industrial base suffer because of a single currency and cite Greece as example. Whether it is true or not, a relook at common currency model may help minimize collateral damage.

Greece can’t repay international loans in the near future even if it tightens its belt and take some unpopular measures to shore up government revenues. In any case, such steps hardly help in recovery which calls for long-term measures at national and lenders’ level, particularly EU.

The economic crisis that has crippled Greece doesn’t affect us at individual or national level. But there is a lesson. Put simply, it is a case of taking massive loans and defaulting on repayments.

It can happen to individuals, corporations and countries. At micro-level, individuals borrow money from banks, finance companies and, in rural India, from money lenders to buy houses or motor vehicles or to invest in small and big businesses or for personal use. If they fail to repay according to agreed terms and conditions, the lender will attach their immovable properties through various recovery procedures. In the case of companies, they can declare bankruptcy and seek legal measures to settle their debts. But, at macro level, if a country fails to repay billions borrowed from global lending agencies what happens?

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