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July 7, 2015

Is Greece doomed? These are the 3 questions everyone is asking

Supporters of the Greek Communist Party gather for an anti-austerity rally in central Athens, June 26, 2015.

Image: Marcos Andronicou/NurPhoto/Corbis

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By Jason Abbruzzese

Greece is in the ugliest situation imaginable: dead broke, humiliated in front of its European partners, destined to make spending cuts that leaders are convinced have already destroyed the country.

Greece has already missed a payment to the International Monetary Fund and is seriously in danger of missing other payments on its debts. In August, banks and hedge funds will come knocking on Greece’s door for their debt. If Greece can’t pay them, it will create financial panic across Europe.

It’s easy to see the case for doom, but it’s not time to throw in the towel yet. Greece could still negotiate its way out of its problems. First, however, it will have to answer three major questions.

To get fully caught up, read our explainer of the five things you need to know about Greece’s financial meltdown and this guide to the personalities in the Greek crisis.

1. Why is everyone so angry?

Money is the excuse for everyone’s anger, but it really comes down to pride. Greece’s pride won’t let it take its marching orders from German Chancellor Angela Merkel and other countries. Germany’s pride won’t allow it to keep bailing out Greece without asking for some financial reforms to make sure the money isn’t falling into a black hole.

The money, however, provides plenty of reason for each side to feel wounded. Greece has borrowed a lot of it over the last few years in an attempt to pay down their government debt that piled up as their economy slowed.

In return for that money, Greece agreed to some deep budget cuts that have only further hurt their economy. This is called austerity, and the Greeks are understandably tired of it. The situation has also coincided with a sharp rise in suicides in Greece. Living standards have collapsed in recent years as shown by this graph from economist Max Roser.

Roser data

Max Roser (2015) Incomes across the Income Distribution. Published online at OurWorldInData.org.

Image: Max Roser

Meanwhile, the rest of the Eurozone is pissed because Greece needs their money to pay debts that are about to come due, but doesn’t want to agree to more austerity — especially because that money is not going to help Greece. Most of the money for Greece’s “bailout” has in fact gone to banks and hedge funds who hold Greece’s debt. If Greece were a consumer, this would be like getting a loan, but instead of doing anything else with it, you have to use it all to pay off your mortgage.

JP Morgan estimates only €15bn of €410bn total “aid” to Greece went into economy – rest to creditors. No wonder they are cross

— James Mackintosh (@jmackin2) June 15, 2012

2. Is Greece doomed?

It might sound over the top, but it’s a legitimate question at this point.

Years of austerity — in which the country slashes budgets in an effort to cut down on debt — have taken a serious toll on the country’s economy. Now, there is concern that Greece could end up in dire straits no matter what happens.

Greece has a big vote coming up on July 5 — a referendum — that will allow Greeks to decide if they want to go with the EU’s plan of more cuts in return for bailout money.

If Greece votes in favor of the austerity measures (the upcoming referendum vote is still on, despite calls from leaders like Germany’s Angela Merkel to call it off), it would mean yet another round of cuts that economists generally agree would further damage the country’s economy, but also lead to an influx of money to pay Greek debts.

There is also a good chance the country votes “no” — the vote that the current Greek prime minister is advocating — which would reject the austerity measures and bailout money. In this scenario, Greece would default on its many debts and probably plunge deeper into economic hardship.

Greeks have been protesting additional cuts in large numbers.

This pro-government (i.e. #Greferendum NO vote) protest happening now in front of the Greek parliament in Athens pic.twitter.com/1Dz7dUTro3

— Erik Schatzker (@ErikSchatzker) June 29, 2015

This could the result in the country leaving the European Union and abandoning the Euro for a new currency (or a return to its old currency, the Drachma). This is fraught with insecurity, as nobody really knows what would happen to the country’s banks in this scenario.

Greek prime minister Alex Tsipras, however, becomes infuriated at the idea that Greece would leave the euro. He just wants better bailout terms, which he said would create a better future for Greece. He wants Greeks to vote on July 5th to reject the terms of the EU bailout as a negotiating move to get better terms, he said on Twitter.

There are those who say that I have hidden agenda, that w/an #OXI / NO vote, I’ll take #Greece out of EU.
They are flat out lying to you.

— Alexis Tsipras (@tsipras_eu) July 1, 2015

Its unacceptable that in Europe of solidarity bank closure would be forced, as a response to Gov’t letting Greek ppl decide #Greferendum

— Alexis Tsipras (@tsipras_eu) July 1, 2015

And lead to inconvenience of thousands of elderly—that despite financial asphyxiation, government ensured their pensions. #Greece

— Alexis Tsipras (@tsipras_eu) July 1, 2015

We’ve been strenuously negotiating past months to protect your pensions, protect your right to a decent pension. #Greferendum #Greece

— Alexis Tsipras (@tsipras_eu) July 1, 2015

You’re being blackmailed & urged to vote Yes to all of institutions’ measures without any solution to exiting the crisis. #dimopsifisma #OXI

— Alexis Tsipras (@tsipras_eu) July 1, 2015

It’s also politically important. The EU won the 2012 Nobel Peace Prize and had been widely seen as creating a system that would ensure an end to war in the region. Not that war would break out if Greece left the Euro, but it’s a step away from what had been heralded as an unprecedented alliance for peace and economic security.

3. Just how big could this problem become?

Sometimes a risky bet just hurts the person who made it. Other times, a risky bet can start a chain reaction that ends up hurting a lot of people.

The concern here is that a Greek default would hurt other institutions and countries, which could then become financially insecure. If they fall, others could feel the brunt of that impact. It’s kind of like dominoes falling.

The latter example is what happened during the financial crisis, in which banks had become so intertwined with risky bets on the housing market that they were all in danger when prices began to decline.

It’s incredibly hard to forecast exactly how many institutions, investors and countries would be hit by something like a Greek default, in which the country essentially admits that it can’t pay its debts.

Investors on Monday seemed pretty spooked by the proposition. Every major global market was lower. The U.S. benchmark S&P 500 Index was off 1.1%; China’s Shanghai Composite Index fell 3.3% and the European FTSE 100 lost 2%.

On the upside, some major economists do not believe that Greece will have a dramatic impact on the rest of the world. Global banks don’t have that much tied up in Greece debt, and the European Central Bank’s bond buying program should provide a “back stop” that limits any broader damage to the region.
The ongoing market turmoil is also something that could help force the sides into an agreement. Greece is staring straight into the abyss with almost no safety net. Europe knows that without a deal, things will only be getting worse before they get better.

Topics:
Business, Greek Crisis