With over a million words already written about it, the happenings in Greece have taken the financial world by storm. It is not simple to write in words the occurrences of the western world. The whole of Europe, howsoever beautiful it may seem, is in tatters over the great Greek Tragedy!
Greece is stuck in a catch-22 situation and may just “officially” become the first country to default on its debt obligations. The European Union since its inception in 1998, with dreams of bringing the Europe together by sharing a common monetary denomination, is about to meet its end, and trust me it won’t be pretty.
I will make this part a bit short, and request you to refer the link to grasp the precarious situation.
The following would help you understand the difficulty Greece finds itself in –
- Debt – In excess of € 320Bn with Reserves of less than € 6Bn, implying a coverage ratio of what – let’s say nil.
- Such large debt with a Fiscal deficit of 2% in last FY
- A Debt to GDP Ratio – 170%
- Fall in GDP since 2010- 25%
- Youth Unemployment Rate – 25%
- Yield on 10 Year Bond – Upwards of 11% as against a Eurozone Average of less than a percent!
- With Citizen Morale at rock bottom and
- World Confidence – An absolute zero
Breakdown of the Greek Debt
A question which we keep on asking ourselves is how can a country afford to go bankrupt? What could possibly make a nation reach its brink, where after it is destined to get wiped off?
The answer is simple; the answer is one which everyone knows. The basic rule of finance – borrow to produce, not to consume, was violated. With its breath taking scenery, impeccable infrastructure and world class amenities, Europe has long been a benchmark of what every country aspires to be. But, at what cost – that of others.
Greece, a country known for its history, is all set to write another chapter –this time just not so glorious.
In spite of two mouth-watering bailouts amounting to € 240Bn from the “troika”, Greece has nothing to show for its repayment capabilities. The term loans and bonds are set to come up for repayment starting from the end of this month.
The Government, led by Prime Minister Mr. Alexis Tsipras, leader of the left wing Syriza party, finds itself grappling with the ‘herculean’ task of re-negotiating with the creditors. Asking them to not stop their ‘charity’ and continue the flow of capital, while pleading to water down the strict austerity measures imposed. And, all this when the private creditors have already taken a hit of more than 50% on the principal at face value, the largest write off in history of sovereign debts.
Greece has long enjoyed the toils of its neighbours and Germany pays testimony to that. The charming German Chancellor, Angela Merkel along with European Council President, Donald Tusk have done away with the niceties and strongly voiced the realities. The Greek Govt. has been rebuked for cooking up the books and stretching the negotiations for far too long. The neighbouring Germans are growing impatient (and why not, they are the biggest lenders to the faltering country), and have out rightly rejected the plea for further extensions of loans.
The Greeks want the world to forgo their lendings
And above is the reply of the Germans
As advocated by prominent economist, adopting the Euro was a one way ticket. The Greek FM, described the euro membership using a lyric from the 1976 Eagles song “You can check out any time you like, but you can never leave”.
Workers spray paint and protest at finance ministry entrance
against the continued austerity measures
The Options –
- Avoid the ‘GREXIT’ –
This would require the co-operation between both the parties to the contract. Prevention of fallout of Greece from the Euro would only happen if Greece successfully demonstrates its willingness to be a part the Euro. Enhanced austerity measures (cuts in needless spending, higher taxes, pension reforms, and efficient bureaucracy) along with the Government’s ability to pick up the economy would help instil some confidence in the lenders. On the part of the lenders, further haircuts and continued financial support to Greece at liberal credit terms, along with extensions in maturity of loans coming up for repayment would help stabilise the matters.
- Greece switches to Drachma –
This would essentially mean that Greece defaults on its debt. It would be forced to leave the Euro as its currency and switch back to its old monetary unit – Drachma. A default would essentially make Greek an ‘untouchable’ among other European countries. With bankruptcy on its name, no one would make business with them. The value of the imports would go through the roof as exchange rate would go down the floor. The banks would default, and as the banking system collapses, the economy would go into a tail spin. A country dependent on imports for its energy and pharmaceutical needs, as Greece is, would theoretically go back to Stone Age. Practically, Greece would cease to exist. Law and order would be compromised, and the world would witness the rise of another North Korea, this time bang in the heart of Europe.
Did someone say Russia
When all these theatrics play out, Russia cannot be left out, can it be?
A country, deprived of funds, on the edge of insanity would do whatever it can to survive – and Russia would be willing to be its saviour, bringing along its hoard of oil and cash. After all, who wouldn’t want to play in the beautiful Athens when you get your adversaries living in the background? Strategically, Russia could play a master-stroke if it secures Greece as an ally. An advantage, so luring, it would make hell and heaven one, to get!
Cheers to the Default!
Pave way, my turn now.
After all, it’s more than just a co-incidence that both the Cold war of 1944 and the Eurozone crisis in 2010 have their origins in the streets of Athens.
A lot of it is on the line. A small country in Europe has the potential to make the whole world topsy-turvy. The drama is beginning to unfold, my friend.