More misery and turmoil loom for Greece

Barry Wood says with a majority 'no' vote for further austerity, it's unclear where the cash to run the country will come from, raising the possibility of a temporary euro-zone exit, at least

PUBLISHED : Monday, 06 July, 2015, 2:12pm
UPDATED : Monday, 06 July, 2015, 2:12pm

As Greeks voted on Sunday, the cover of the German financial daily Handelsblatt depicted Prime Minister Alexis Tsipras holding a gun to his head beneath the caption: "Give me the money or I'll shoot!"

His defiance was endorsed by Greeks, who voted "no" to the bailout programme on offer from the International Monetary Fund, European Union governments and the European Central Bank. But although Tsipras' anti-austerity government survives, he will not quickly obtain the cash and debt relief his country so desperately needs.

Now comes the test of the assertion of combative Yannis Varoufakis, who resigned yesterday as finance minister. He said the cost of kicking Greece out of the euro zone is so high that it simply won't happen. Before the referendum, Varoufakis likened the creditors to terrorists because they insisted that the central bank stick to its rules, limiting financial support to cash-depleted Greek banks. It's unclear when the closed banks will reopen.

Varoufakis said if creditors really wanted an agreement, one could be had within 24 hours. That implies that the creditors would acquiesce to the Greek position, a highly unlikely prospect.

Does the no vote mean that Greece will exit the euro currency? Not necessarily and not quickly. Several European leaders characterised the referendum as a vote on keeping the euro or reverting to the drachma, a view rejected by the government.

So what happens now? No one knows. Surely there will be meetings between the Greeks and their EU partners, but cash is unlikely to flow, and Greece remains cut off from financial markets. It is also blocked from multilateral lending since it owes the IMF, the financial rescue agency.

Six months ago, Tsipras' radical Syriza party took over, promising to undo the austerity that creditors demanded in exchange for US$250 billion of loans.

Surely there will be meetings between the Greeks and their EU partners, but cash is unlikely to flow.

Tsipras has reversed some spending cuts, rehired laid-off workers, and halted the privatisation of the largest Greek port to Chinese investors. Creditors were not happy.

A core belief of Tsipras and Varoufakis is that government stimulus was required to revive economic growth. While that strategy worked in Britain and the United States in the aftermath of the 2008 crisis, euro-zone rules meant it could not be implemented in Greece. In a common currency zone, tax and spending policies must be coordinated to keep the system intact.

Greek policymakers have been in a straitjacket since hitting a financial wall in 2010. Their options ranged from bad to disastrous. The choice was always to either stick with austerity or abandon the euro.

Tsipras initially hoped that leftist parties in the euro-zone periphery would rally to the anti-austerity cause. That didn't happen. Similarly, the hours Varoufakis spent lecturing at euro-zone meetings alienated his counterparts. Instead of rallying to the Greek cause, Spanish, Portuguese and Irish financial officials said that although they didn't like taking the austerity medicine, they were seeing positive results. Greece, they said, should not be let off the hook.

The dénouement between Greece and Europe occurred over the past two weeks as Tsipras rejected the bailout offer, defaulted on debt to the IMF, and called the referendum. What had been theoretical talk of a "Grexit" suddenly became frighteningly real.

German Finance Minister Wolfgang Schäuble has said: "We will not leave the [Greek] people in the lurch." But he has also raised the possibility of Greece at least temporarily leaving the euro zone. The paramount objective of the German government is to limit the damage and safeguard the euro.

Concerning the massive Greek debt, some kind of write-down is inevitable. The question is whether it comes from compromise or outright repudiation, as Argentina did.

Paul De Grauwe, a professor at the London School of Economics, says a new balance must be found between Greece's creditors and the Tsipras government. But until that happens, Greeks face uncertainty, turmoil and added misery.

Columnist Barry Wood has been writing about Greece and the euro for several years