photo by Flickr user MPD01605
The long-running Greek soap opera may be reaching its climax - a fitting term, derived as it is from a Greek word for “ladder.” It has been a long climb.
I reach this conclusion with some trepidation, because when it comes to leaders of any nation in continental Europe, it is never a good idea to underestimate the capacity for another plot twist, especially one that delays any sort of reckoning.
But for Greece and its people, the world changed this morning. Greek banks are closed for this entire week, and cash withdrawals have been limited 60 euros (about $66). Many Greek ATMs are empty anyway, after a last-minute rush over the weekend when the government decided on these extreme measures. It is also illegal to send money abroad. Apparently, even Greeks who hold credit cards issued in other EU nations can’t pay their bills without running afoul of the country’s new capital controls.
On Tuesday, Greece will officially go into default on 1.6 billion euros that it owes the International Monetary Fund.
Thus, Greece remains a member of the eurozone only in name. Imagine a New Yorker who can’t buy anything from Amazon because it would require sending money to Seattle, and you get the general idea.
The immediate trigger for the crisis is the European Central Bank’s refusal to keep expanding the “Emergency Liquidity Assistance” it provides to the Greek central bank (an ECB member). This assistance, in turn, has allowed the Greek central bank to provide euros to Greek financial institutions that have no other way to meet depositors’ demands to get their money back. The withdrawal of the ECB’s assistance was the immediate trigger for the liquidity crisis that necessitated Greece’s bank freeze.
But beyond the revoked ELA, the real difference today as compared to one month ago, or five months ago, is that other Europeans have finally concluded that it makes no sense to continue lending more money to a nation that is very unlikely to ever pay it back. Indeed, the Greeks are right when they say they need to have their existing debts restructured - meaning, in this case, partly forgiven - because they just can’t meet their obligations any other way. In a practical, rather than legal sense, the nation is bankrupt. What is happening now is the slow and painful evolution of a reorganization plan.
But even a bankrupt entity typically has assets and future earning power on the table. The essence of any restructuring is a negotiation over how the existing assets will be divided among the bankrupt entity’s claimants and how much of those future earnings the entity will be allowed to keep. If you take too much away from the bankrupt party, it loses any incentive to go out and work to make those potential future earnings a reality. Would you go to work every day if all your compensation went to pay your prior debts? Probably not. Neither would the Greeks.
On the other hand, Greeks obtained the benefits of eurozone membership in the first place through statistical fraud, and they obtained most of the money they borrowed prior to their 2010 crisis through similar deception. In that period they also became accustomed to European standards of living even though, in an economic sense, they belonged not to the prosperous European club but to a much poorer group of emerging economies to the east. Greece’s creditors have no intention of financing a continuation of those living standards when the Greeks inevitably cannot sustain them.
Many analysts continue to insist that a Greek exit from the euro is unlikely. This is based, as near as I can tell, almost entirely on a theory that politics will trump mathematics and economics, which can only happen if lenders keep sending money to Athens that they never expect to get back. My guess is that a Greek exit from the euro is inevitable, and that the sooner it happens, the faster we will get some real indication of how much of its debt Greece may ever repay and when it might do so. The probable answers are not much and not soon, respectively.
This sudden dose of reality sent markets sharply lower in most parts of the world on Monday. But this is not the start of a global financial shock; Greece is nowhere near important enough to trigger that. In the end, the global consequences of Greece’s financial failure are no more significant than those of Argentina’s in 2002 or Russia’s in 1998. It doesn’t matter to us in the long run. It matters to Europe, but since most of the money already lent to Greece is never really coming back anyway, it doesn’t even matter all that much there.
It matters most to the Greeks, by far. All the economic progress they made in the decades leading up to 2010 has proven to be an illusion; the country is as poor as ever, and now its credit is ruined as well. The economic pain incurred since 2010 has mostly been for naught, too, now that their refusal to make the real structural changes demanded by creditors has persuaded their bankers to cut them off. The Greeks are poor, broke and will soon find themselves alone.
That pretty much sums up any bankruptcy when restructuring negotiations fail. The best remaining hope for the Greeks is an exit from the currency that they never should have adopted, an eventual settlement with creditors that allows them to at least stay members in good standing of the European Union, and a future government that will be smaller, more efficient, and willing to let Greeks turn their devalued drachmas into a real currency - one that lets them rebuild a financial future.