The Greek sovereign debt crisis has entered its critical and seemingly final stage. A referendum on the latest terms offered by the Eurozone is to be implemented in Greece by the ruling Syriza party. Fractious negotiations between the Greek government and its creditors broke down at long last over the weekend. The Greek government have called for a rejection of the terms, which it is predicted would result in Greece leaving the Euro, as well as likely resulting in the nation defaulting on its loans. Banks in Greece are to stay closed for the week, and international markets have been shaken by the continued crisis.
The negotiations ended acrimoniously, with various European officials condemning the stance of Greek Prime Minister Alexis Tsipras. EU Commission President Jean-Claude Juncker has said that he feels “betrayed” by the Greek presentation of the talks, while German Chancellor Angela Merkel has stated that no more concessions will be offered. Prime Minister Tsipras has stated that he believes that a no-vote in the referendum would enable him to strengthen his hand in any future negotiations- and that the effects of Greece leaving the Euro are too costly to be contemplated.
A combination of the uncompromising stance of the Syriza government and the willingness of European lenders to start talking tough has lent the situation a feeling of inevitability. International Monetary Fund head Christine Lagarde stated that if Greece did indeed miss the payment on its loans, then the country will be declared in default. Chancellor Merkel’s has stated to the German parliament that Berlin could accept Greece’s exit (or Grexit) from the single currency. Mrs Merkel’s confidence is due to a financial firewall which has been provided to assist financial markets and governments. Should the Greeks leave, this will provide loans to insulate against the threat of contagion or panic.
A sharp fall in Greek bank deposits has taken place, with worried citizens withdrawing €3.2 billion in four days alone. Mass capital flight of this type, even before the closure of banks, had intensified fears of a banking collapse in the Mediterranean country.
The anti-austerity Syriza government had refused to change its stance on implementing the structural reforms requested by Greece’s creditors. This resulted in vital bailout funds being withheld by the European Central Bank and IMF. Compounding these woes has been a fall in tax revenues- a €900 million black hole in the state finances. This represents a 24% fall in revenue, in a country which has seen its overall GDP contract by roughly a quarter since 2007.
For the first time in this crisis, those sympathetic to the Greek government’s position have attacked their unwillingness to compromise. Pierre Moscovici, the European commissioner for economic affairs and an ally of the Greek government, had called on the Greek government to accept ‘reasonable compromises’. Although most European leaders and officials have expressed a desire for Greece to stay within the Eurozone, the constant breakdown of talks seems to have resulted in a somewhat fatalistic attitude.
Although this has happened before, with both the Greek government and its creditors playing a dangerous game of financial chicken, this time a Grexit does look closer than ever. The patience of Greece’s creditors, particularly Germany, has worn thin.
The implications of a Greek default would obviously be most acutely felt in Greece. The country will have to reissue its old currency of the Drachma and accept its devaluation. Spending cuts and tax rises are also likely to occur due to the heavy debt burden Greece is under. Most immediately, several Greek banks are likely to collapse without access to capital provided by the European Central Bank (ECB). Fears of this led to queues at any ATM still dispensing cash in Athens, until it was announced that banks would remain closed for the duration of the week.
However, this situation will not only affect Greece, the threat of contagion has once again become a prevalent threat which Eurozone officials are trying to avoid. Market analyst predictions had been a 40% chance of a Greek default before the final collapse of talks. If this occurs, the borrowing cost for other weakened Eurozone economies such as Spain and Portugal will increase over the threat of contagion from the Greek crisis.
The UK has limited exposure to Greek government debt, with the Bank of England calculating that the total financial exposure equates to £7.7 billion (this compared to the European Central Bank, at €118 billion). Despite this, Chancellor George Osborne has warned that the Greek exit would be “traumatic”, emphasising potential knock-on results.
Despite the tough talk, the threat of a Grexit remains a situation which European leaders are desperate to avoid. What is utterly clear however is that international lenders no longer feel that talks in good faith may be held with Syriza.