A genuine Greek tragedy

Staring into the abyss: What if Greece rejected austerity?


Immediately after the referendum, Greece will still be a member of the EU: their implicit decision to default on loans from the EU ought to carry the automatic sanction that there will be no further disbursements of EU structural funds, agricultural subsidies, EIB loans and the like. Planned capital injections of this type currently total about 7% of Greek GDP.

Moreover, it would be quite unlikely that the private sector would be willing to lend to any Greek entities -- unless secured by cast-iron collateral (and contracts) outside Greece.

The current Greek external deficit would then have to move into balance as there would be no financing available for excess imports. Indeed, imports would drop by around a quarter -- and swiftly. That would be an exceptionally painful process.

Greece cannot leave the eurozone under the terms of the existing treaty. In principle, that treaty could be changed if all other countries agreed but that would be a lengthy process and as the risk became widely known every sensible Greek depositor would withdraw euro deposits from the Greek banks and move them abroad.

Such a bank run would be the liquidity crisis that triggered the rapid collapse of the entire Greek banking system. Again, dramatically painful consequences for the economy would ensue.

If opinion polls were still pointing to rejection as the day approached, any other eurozone members at risk would see these dire consequences unfolding, encouraging them to take all necessary steps to avoid a similar fate.


The unfolding Greek tragedy will only encourage such states to put their probity beyond doubt, and their voters would have a very clear understanding of why their leaders were asking for such efforts.

Bottom line: the eurozone "political union" that effectively emerged completely at the October 26 summit would see a powerful advantage in standing closely behind such members, and the eurozone in aggregate would be transformed fiscally -- especially in comparison with say the US and the UK.

For the unfortunate Greeks, most of the bad news would develop in advance of the vote if the markets expected a No.

But such ghastly developments might encourage voters to say Yes and accept the offers of help.

However, it could just be a bit too late to avert a genuine Greek tragedy.

Comment: They will be scr*wed if they vote no! But they will! (My prediction). Image from the Theatre of ancient Greece

No comments:

Post a Comment

Any anonymous comments with links will be rejected. Please do not comment off-topic