The Greek debt crisis – digested read

http://www.theguardian.com/world/2015/jun/23/the-greek-debt-crisis-digested-read

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How long can something remain on the the brink before it becomes the status quo? The Greek economy has been on the brink of collapse for so long now that no one can quite remember a time when it wasn’t. Even before Greece joined the euro in 2001, the more hard-nosed economists from northern Europe regarded the drachma as a second-class currency as Greece was suffering from high unemployment and low growth.

Following the introduction of the euro, the Greek government attracted a large amount of money from overseas investors confident their loans would be underwritten by the European Central Bank. Up until 2007, these were happy days for Greece: public spending soared, the economy grew and the government could continue to ignore the widespread corruption and tax avoidance that had been endemic in the country for decades. In the meantime, Greece continued to run some of the highest structural deficits and debt-to-GDP ratios as the world continued to delude itself that economic boom times were here to stay.

After the global financial collapse of 2008, many countries became twitchy about their Greek investments – partly because the Greeks were understandably reluctant to supply any information which might reveal that the situation was even worse than anyone imagined, but mainly because the traditional escape route of currency devaluation was off the cards within the eurozone. Come 2010, the scale of the Greek crisis became unavoidable when credit agencies downgraded Greek government debt to junk-bond status and the prospect of Greece defaulting on its loans became a possibility.

To help stave this off, the eurozone countries, the European Central Bank and the International Monetary Fund – thereafter christened the troika – bunged the Greeks a €110bn (£78bn) loan to tide them over for three years. The money did come with some strings attached – the Greeks were obliged to implement structural reforms and austerity measures – but the driving concern was to stop the Greeks from going bankrupt and leaving the eurozone.

The €110bn loan was swallowed up in just over a year, leaving the troika little option but to hand out a further €130bn to avoid Greece defaulting on its sovereign debt. In compensation, the troika demanded even further concessions from the Greeks. Think payday loan shark demanding an extortionate APR interest rate from someone whose legs they are already threatening to break. The Greeks took the money because it was there and also as they were desperate. Though not desperate enough to do anything about corruption and tax avoidance by the rich, so the burden of the austerity measures fell on those least able to afford them. By 2015, unemployment was running at 25% and the country was still, to all intents and purposes, just as broke as it always had been.

In their January general election, the Greeks reckoned enough was enough and voted in the leftwing Syriza party, who had run for office on an anti-austerity campaign. As far as Syriza was concerned, if the troika wanted their money back they could whistle for it. Working on the principle that if you owe the troika €10m they own you, but if you owe then €240bn then you own them, the new Greek government chose to call the troika’s bluff.

Which is why the Greek debt crisis is now left permanently on the brink. The troika is now in so deep it can’t afford a Greek default; nor can it risk a Greek exit (Grexit) from the euro in case other countries – Portugal and Italy are prime suspects – follow suit leaving the eurozone to collapse in a pile of worthless dominoes. But the Greeks are also in too deep to risk a default: were they to leave the euro and return to the drachma then the economy would become one of a third world nation.

So we’ve reached a total impasse. Syriza will have to agree to more austerity measures than they would like – a cap on state pensions and an increase in VAT – and the troika will continue to bail out the Greeks on an ad hoc basis. It’s set up for a lose-lose situation, as no sooner does the troika pump in more cash, than the Greek people withdraw it. Better to have your cash under the mattress in euros, than leaving it in the bank where it could be turned into worthless drachmas at any moment. No matter who blinks first, everyone loses.