Will Greece Avert Financial Derailment?

Image composite by Thursday Review of Euros & Greek flag

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Will Greece Avert Financial Derailment?
| published July 6, 2015 |

By Keith H. Roberts Thursday Review contributor

Over the weekend, in a referendum meant to decide the fate of Greek participation in the European Union, Greek voters resoundingly repudiated the need for more austerity—meaning no more tax increases, no more cuts to social spending, no more talks of reduced pay or pensions. Instead, Greece said “no” to more financial support from Europe and the International Monetary Fund.

In the wake of the outcome of that national vote, Yanis Varoufakis, Greek Finance Minister, has resigned. Now, the Greek government must quickly decide what course of action to take before the country spirals deeper into financial and monetary crisis. Banks and financial institutions could run out of cash as early as this week.

But the Greek vote may also spell some form of divorce from the euro, meaning that Greece may exercise the option—risky though it would be—to simply begin printing its own currency. Whether the EU pushes Greece out, or whether Greece walks out of its own accord, remains to be seen. A Greek default could have widespread negative consequences across Europe, where many economies are still struggling to emerge from the conditions of the Great Recession. A Greek exit from the Eurozone may also trigger similar departures by cash-strapped Italy and Portugal—two nations also under pressure to pay back huge loans.

Last week, amidst extreme pressure and political confusion, bankrupt Greece missed its scheduled $1.9 billion debt payment to the International Monetary Fund. Greek officials said the country was unable to make even a partial payment. Negotiations over the crisis became tense as international bankers and lenders called for Greece to reduce its spending, and rein-in costly payments to pensioners and subsidy programs in a country staggering under the weight of one of the highest rates of unemployment in Europe.

Banks and the IMF have loaded Greece billions of dollars, but years of austerity measures have failed to produce a turnaround, leading Greeks to become disillusioned with the arrangement. A recently elected leftist government had worked feverishly to resolve the crisis, but it was unable to find a palatable solution during sometimes heated discussions with other European leaders and negotiators.

Currently, Greece owes more than 300 billion euro to its creditors, and that debt amounts to 180% of its GDP. Other lenders have the option to step in and give Greece more cash, but most analysts say that this scenario is unlikely, considering the depth of the Greek financial crisis. A Greek exit from the euro—whether forced or voluntary—would be the first time any member of the 28-nation partnership divorced from the currency or the economic union.

Varoufakis had frequently sparred with European negotiators over the terms of an extension on the debt payment. His resignation is meant to open a path to further discussions between Europe, the IMF and Greek negotiators. Greek’s leftist Prime Minister Alexis Tsipras had campaigned with a pledge to resolve the crisis, but as tensions soared in the last few weeks Tsipras called for a nationwide vote on whether to remain in the Eurozone, or whether to walk away from the demand by other euro partners and the IMF that Greece tighten its belt further. Tsipras had said such demands were tantamount to extortion for the cash-strapped nation.

Many banks and financial institutions will remain closed early this week, and the government has imposed strict limits of ATM transactions and credit card activity. There are also severe limits now placed on cash transactions and transfers between accounts in Greece and in other countries, an attempt to keep money available in Greek banks. Many Greek citizens have stood in long lines at banks to withdraw whatever cash they could obtain in order to quickly buy essentials—groceries, bottled water, medical supplies, shoes—needed to weather the storm if the crisis deepens.

In the meantime, Greek officials and European negotiators hope to somehow jumpstart new discussions to avert a widening problem for both Greece and Europe. On Wall Street in late June, investors were initially spooked by the deepening Greek crisis, but over the course of last week U.S. investors placed less worry on the financial problems in Greece amidst talk that Europe and the IMF would eventually find a solution.

Related Thursday Review articles:

Greek Default Could Have Wide Impact; Thursday Review staff; Thursday Review; June 30, 2015.

Greek Debt Crisis Spurs ATM Panic and Bank Closures; Keith Roberts; Thursday Review; June 29, 2015.