The Greek people have voted no to their bailout, no to austerity, and, quite possibly, no to the euro itself. That last part, though, depends on what the European Central Bank does in the coming days.
Now, in the end, the Noes won a landslide 61 percent in Greece's referendum over whether to accept Europe's bailout. But given the stakes, there was a little bit of farce about it. Greece went to the polls over an offer that Europe had technically pulled, and there was only a vote in the first place because Europe had rejected Greece's offer to cut their budget as much as was being demanded but in a different way than was being demanded. In other words, Greece and Europe might divorce each other not because Athens refused to do a certain amount of austerity, but because it refused to do a certain kind of austerity. Specifically, Greece wanted to cut its pensions at a little bit slower pace and exempt its island hotels from a higher sales tax. That's it.
It seems like a bad joke, but Europe really might let 60 years of integration go into reverse over what sales tax Greece's hotels should use. It'd be as if the U.S. Constitutional Convention had broken down over whether to call it the Senate or the Upper House. And make no mistake, that's what Europe is trying to do here: build a United States of Europe. Ever since World War II ended, the continent's countries have tried to make further bloodshed impossible by not only tying their economies closer and closer together, but also hoping that this would force them to forge a political future together.
But now, for the first time, there's a chance that this process of an ever closer, if imperfect, union might begin to unravel. Greece's No vote leaves both its government and its banks without the financial lifelines they need to stay afloat, perhaps pushing them out of the euro. Not even the surprise resignation of Greece's finance minister Yanis Varoufakis, who had become Europe's bête noire, might be enough to bridge the differences between the two sides. After all, he'd already been sidelined for months. No, the real problem is that, no matter who's negotiating, neither side trusts the other. It's hard to see that changing in a few days either.
So where does that leave Greece? Well, maybe outside the euro zone. Here are the three big questions that will decide Greece's economic fate and Europe's political one in the next few days.
1. Will the ECB let Greece's banks collapse?
The short answer is yes. Greece's banks are running out of cash, and while it isn't clear whether will that happen on Tuesday or Wednesday or Thursday, what is clear is that it will happen soon. Closing the banks, limiting withdrawals to 60 euros (about $66) a day, and preventing people from moving money abroad has only slowed down the run that threatened to pull them under last week. Depositors are becoming even more worried — and with good reason — that their money will either get taken to bail the banks in, or get turned into drachmas that wouldn't be worth anywhere near as much so that the government could bail the banks out.
But it's important to remember what forced them to shut in the first place. That was the ECB's decision not to approve any additional emergency loans for Greece's banks. The problem is those banks have a lot of assets, like government-guaranteed bonds and deferred tax assets, that they can't readily turn into cash. So the ECB had actually been doing its jobs as a lender of last resort by accepting these assets as collateral and giving Greece's banks euros in return — that is, until last week. That's when the ECB said it wouldn't provide any more emergency loans than the 89 billion euros it was already providing, in effect lighting a time bomb under Greece's financial system.
And now it just shortened the fuse. How? Well, rather than reducing the total amount of emergency credit it's giving Greece's banks, the ECB is reducing how much emergency credit Greece's banks can get in return for each individual bond. The rationale is that the government's guarantee isn't worth as much now that it's defaulted to the IMF, so bonds that need that guarantee to be acceptable collateral aren't as acceptable anymore. That means, for example, that instead of getting a 50 euro loan in return for a 100 euro bond, you might only get a 40 euro loan now. This won't hurt the banks that have more collateral than they can use right now — which is most of them — but it could push the weaker ones into bankruptcy today rather than tomorrow. Indeed, there were rumors that one of Greece's big banks would fail if the ECB did this. Well, now we'll find out.
It's more than a little gratuitous. The ECB is giving Greece's banks another push off a cliff that they were about to fall off of anyway. In other words, Greece's banks would have gone bust even if the ECB hadn't done less, but just hadn't done any more. So the ECB's promise to do whatever it takes to save the euro apparently was a promise to do whatever it takes to save the euro except for Greece. It should be shocking. The ECB not only watched a bank run happen that it could have stopped — in fact, it made the panic worse — but has also nudged Greece's worst-off banks one step closer to oblivion. That's not what you do if you're interested in giving the Greek government the time to try for a last-ditch deal.
2. Will Greece start printing its own money?
You can't have an economy without banks or money, and Greece doesn't have either right now. Its banks are closed, its companies can't get credit, and its government has run out of cash. And it's only going to get worse. That's because firms that would have made money are losing it now that they can't buy supplies from outside the country, and the loans the banks made them that should have been good are going to go bad as a result. So more layoffs are coming in a country that already has 25.6 percent unemployment.
If the ECB doesn't give Greece's banks the euros they need, the only way out would be for Greece's government to start creating its own currency. Now, it wouldn't be a drachma at first, but it wouldn't be a euro, either — it'd be an IOU. That's what California did when it ran out of cash during the Great Recession, and it's what Greece's now-former finance minister Yanis Varoufakis says they'll do now. The government could start paying its employees with this scrip, and telling people that they could pay their taxes with it. That'd be enough for banks and businesses to accept it — at a discount to the euro, of course — and the economy to start functioning with at least a facsimile of normalcy. Companies might also start their own IOUs.
The beauty of an IOU is it exists in the legal gray area between money and debt. If Greece somehow manages to stay in the euro, it could always say that it hadn't printed any new money, since IOUs were just new debts. But if it does ditch the common currency, then the IOUs would be a bridge between the euro and the drachma while Athens goes about the more-difficult-than-it-sounds business of getting the printing presses going. Greece might not have a choice, though, if its banks fail. Then the government would only be able to fill the hole in the bank's balance sheet by either taking people's deposits — Europe leaked its plan to tax all Greek deposits over 8,000 euros by at least 30 percent — or printing the money instead. If it chose the latter, though, there wouldn't be any pretense that this wasn't a new currency. The drachma would be here.
3. Will Europe even negotiate with Greece anymore?
It's no secret that Europe's leaders don't like Greece's. You don't exactly make friends in Europe, let alone influence people, by telling Italy that its debts are also unsustainable or Germany that it owes you reparations for World War II. It won't hurt that Varoufakis has stepped down, but it probably won't help enough either. It's entirely believable, as Germany's Vice Chancellor Sigmar Gabriel said, that Europe thinks Greek Prime Minister Alexis Tsipras has "torn down the last bridge of compromise." In that case, Athens had better express order those printing presses.
But is Europe really willing to let 60 years of integration go to waste over ... getting pension cuts in 2019 instead of 2020 and higher hotel sales taxes? Maybe not. France and Germany have already called for another summit on Tuesday, so there's at least one more chance for the two sides to close the final inch between them. There's a better chance, though, that Europe's leaders will give the ECB the OK to pull the plug entirely on Greece's banks instead, and just be done with them.
Why? Well, it's the debt. The mistake most people make is thinking that Syriza is just an anti-austerity party. It is, but more than that it's a pro-sovereignty one. In other words, it doesn't want Europe to tell Greece what to do anymore. And that's why it's made what seems like the puzzling decision to focus on reducing Greece's debt rather than reducing Greece's austerity.
It's strange to say, but Greece's debt is mostly meaningless at this point. It's an accounting fiction more than anything else. Greece's interest rates are so low and it has so long to pay back what it owes that even though its debt is 175 percent of gross domestic, its debt payments are a much more manageable 2.6 percent of GDP. That's less than Spain or Italy or Portugal are paying. The bigger problem, as The New York Times' Paul Krugman points out, are the budget cuts it's supposed to make. Because Greece can't cushion the economic blow by cutting interest rates or devaluing its currency, raising taxes and cutting spending by 1 percent of GDP would make GDP shrink by 2 to 2.5 percent itself. That's self-defeating: even though you have less debt, you're less able to pay it because your income has fallen so much.
But some accounting fictions have power, and Greece's debt is one of them. Just ask yourself how Europe has forced Greece to do so much austerity so far. All Europe has to do is say Hey, you know that debt you can't pay back? How about you cut your budget some more to try to pay it back anyways, and Greece has no choice but to do so if it wants to stay in the euro. So, despite what you may have heard, Syriza has actually said it'd do as much austerity as Europe has told it to, as long as debt relief is part of the deal. Athens, in other words, is willing to give Europe power over its budget today if it can take back some of that power tomorrow. But that's not a deal Europe wants.
It's the If-You-Give-A-Mouse-A-Debt-Writedown principle. See, it's not just that Europe doesn't think Greece would follow through on its fiscal promises if it didn't have the constant threat of default hanging over it. It's more that Europe is worried if it rewards Greece for challenging the budget-cutting status quo, then Spain and Italy and Portugal would too and things would get really expensive. Never mind that Ireland unilaterally took the same kind of debt deal — trading high-interest bonds for low-interest ones — that Greece wants now. Or that Europe promised it would think about cutting more of Greece's debt after it first did so in 2012. Or even that the International Monetary Fund just said that 30 percent of Greece's debt needs to be written down for it to be sustainable. (Although Syriza does come in for its share of the blame here, since the IMF thinks the debt would have been all right if this latest crisis hadn't made the economy crash again). The bottom line, though, is that Europe doesn't trust Greece enough to give up its power over Greece, so there probably won't be any debt deal.
Not only that, but Europe doesn't feel it has to come to terms with Greece anymore either. The first Greek "bailout" was only one to the extent that it funneled money from the Greek government to the French and German banks that had lent it money, getting them off the hook if there is a default. And the ECB has begun to buy other countries' bonds and promised to buy as many of them as it takes to keep their borrowing costs down, preventing any panic from spreading. Indeed, interest rates have barely gone up in Spain or Portugal even though Greece really might exit the euro. It looks like the ECB has managed to keep Greece's problems in Greece — which is maybe their biggest problem when it comes to their negotiating position.
Greece might have invented Europe, but Europe might not think it needs Greece anymore.
The Washington Post
Tue Jul 07 2015
Greece's No vote leaves both its government and its banks without the financial lifelines they need to stay afloat, perhaps pushing them out of the euro.
'No one will win a trade war,' China says after Trump tariff threat
Donald Trump says he would impose the tariffs until China stops the flow of illegal drugs, particularly fentanyl, into the United States.
What has caused Pakistan's deadly clashes between police and supporters of Imran Khan?
Topping the demands of Khan's Pakistan Tehreek-e-Insaf (PTI) party is the release of all its leaders, including Khan, who has been jailed on a series of corruption charges since August 2023.
One woman or girl killed every 10 minutes by intimate partner or family member - UN
The report highlights that "60 per cent of all female homicides" are committed by "people closely related to them".
Sweden urges Chinese ship to return for undersea cable investigation
Two subsea cables, one linking Finland and Germany and the other connecting Sweden to Lithuania, were damaged in less than 24 hours.
[COLUMNIST] Building more highways won’t solve traffic congestion - reducing demand will
It is clear that adding more lanes and highways doesn't work, because we are still attempting the same approach to solve the issue.
Hyundai to invest RM2.16 bil in Malaysia through strategic partnership with INOKOM
This investment includes efforts to upgrade INOKOM's existing assembly capacity to meet Hyundai's automotive needs.
‘C4Cinta’ sets record as highest-grossing Malaysian Tamil film
'C4Cinta', directed by young filmmaker Karthik Shamalan, has set a new benchmark in Malaysian Tamil cinema.
Man charged with mother's murder, storing body in freezer
The court denied bail and scheduled case mention on Feb 7 for the submission of forensic, autopsy, and chemist reports.
Abolition of examination in schools to reduce pressure on pupils - Fadhlina
The classroom assessment approach offers a much more interesting learning ecosystem, says Fadhlina Sidek.
Google, Meta urge Australia to delay bill on social media ban for children
Google and Meta says the government should wait for the results of an age-verification trial before going ahead.
Judge tosses Trump 2020 election case after prosecutors' request
It represents a big legal victory for Donald Trump, who won the Nov. 5 US election and is set to return to office on Jan. 20.
DHL plane crash in Lithuania leaves authorities searching for answers
Rescue services said the plane hit the ground, split into pieces and slid over 100 metres (110 yards).
National squad to hold friendly matches for 2025 Indoor Hockey World Cup
The warm-up matches will involve matches against better ranked teams in the world, namely Austria (first) and Belgium (third).
G7 seeks unity on ICC arrest warrant for Netanyahu
The United States, part of the G7, has rejected the ICC decision, with President Joe Biden describing it as outrageous.
Francissca Peter remembers Tan Sri Ahmad Nawab: A tribute to a musical legend
A legend who has influenced our music for decades, was one of the highlights of my career, says Francissca Peter.
TikTok decision coming soon as Jan. 19 divestment deadline looms
Judges are reviewing TikTok's challenge to a law requiring ByteDance to sell its US assets by Jan. 19 or face a ban.
Lebanese sources: Biden, Macron set to announce Israel-Hezbollah truce
In Washington, White House national security spokesperson John Kirby said, "We're close" but "nothing is done until everything is done".
PM meets chaebol tycoon to attract more FDI to Malaysia
Chaebols are prominent figures from South Korea's family-owned conglomerates.
Govt won't allow non-citizen vehicles to enjoy RON95 subsidy - Economy Ministry
The implementation of the RON95 subsidy in 2025 is expected to provide savings of RM3.6 billion to government expenditure.
Ringgit opens lower as greenback gains ground
Dr Mohd Afzanizam says the market responded positively to news of hedge fund manager Scott Bessent heading the US Treasury Department.