What is the Greek referendum? How did the crisis there start? What next? Will India be impacted? Asian Lite presents a primer on the crisis that is rocking not just Europe and its currency but also threatens to spill over to the global economy:
What has been the root cause: In many ways the present-day crisis can be attributed to the single currency introduced in 1999, the euro. Greece has been a member since Jan 1, 2001. This, no doubt, increased trade within the European Union, but also jacked up the labour costs in countries such as Greece, making their exports relatively uncompetitive. This continued to widen the country’s trade deficit and shook government finances.
What is the current crisis: Also known as the Greek Depression, the present-day crisis actually started in 2009 mainly as the result of several inter-linked factors. These included high structural deficits of the government for around a decade, when the government thought it could spend its way to prosperity, the looming recession since 2009, and the threat of debt default by Athens.
What has been the effect: Credit rating agencies downgraded the sovereign bonds of Greece to junk status, making it virtually impossible for the government — or the corporate sector — to raise funds from overseas. Also, since Greece is a member of the European Union with a single currency in 19 member countries, it prevented the government from depreciating the legal tender or printing more notes.
What has been done so far: The troika of the European Commission, European Central Bank and the International Monetary Fund approved a 110-billion euro bail-out package for Greece in May 2010 with some conditionalities, so that Athens does not default on payments. A year later, another dose of 130-billion euros was thought necessary and this was approved in February 2012. A third round of concessions also approved, but the fourth and the last one that came up for discussions last year came unstuck due to elections.
Why did the packages fail: Actually, since the last quarter of 2014, there were ample signs of an improvement in the Greek economy — the unemployment rate declined and so did the deficits. Greece also managed to access the global debt market for the first time since 2009. But the premature elections called in December 2014, and the refusal by the new government to accept the conditionalities, led to the troika suspending all its support. Once again, the cycle of crisis re-surfaced.
Why a referendum: Even as it declined to accept the previous conditions of the troika, the new government under Prime Minister Alexis Tsipras continued to negotiate the subsequent course of action. There was hope. That was at least the case till June 25. But in a dramatic turn of events Tsipras said on TV two days later that a referendum would instead be held on July 5, seeking people’s verdict on whether to accept or reject the proposal of the troika. The government also suspended trading on the Athens Stock Exchange and closed all banks till Sunday, while limiting the withdrawals from ATMs at 60 euros per day.
What is the referendum: The text reads as follows – Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25 and which consists of two documents: The first document is called Reforms for the Completion of the Current Program and Beyond and the second document is called Preliminary Debt Sustainability Analysis. Those citizens who reject the institutions’ proposal vote “Not Approved/NO” [and] those citizens who accept the institutions’ proposal vote “Approved/YES”.
What next: Already, Greek Finance Minister Yanis Varoufakis has announced his resignation after the “no” vote to the bailout. The fact that negotiations with the troika will continue is a given. But the Tsipras government says the no vote gives it more elbow room at the negotiating table. But that is seen as misplaced bravado. It is the general belief that a rejection of the proposal by the Greek people will also mean Greece’s exit from the Eurozone — and further deepening of crisis.
What it means for Greece: The most telling impact can be on the financial system, where people will lose confidence and seek to withdraw every cent they hold in banks. European banks have already loaned over 100 billion euros to keep the banking system in Greece afloat. Once this dries up, and people don’e have access to money, a civil unrest then becomes inevitable. The country will also face rejection by the global investment community.
What about Eurozone: Greece’s 180 billion euro economy contributes a little over 1.2 percent to European Union’s 14 trillion. But around 315 billion euros worth of debt is owed by Athens, of which nearly 60 percent is owed to the European financial system. The country’s exit from Eurozone can potentially shake the idea of 19 countries coming together and adopting a single currency. In case Greece also defaults on its debt payments, some other countries will can face a similar crisis. Investor confidence will be hit and the scramble for retrieving the money can cause a cascading effect, the fallout of which will hit the global markets.
The the impact on India: Analysts claim that a Greek default has been factored in by the markets. That, perhaps, explains why the Indian equity markets did not crash on Monday. But aftershocks will linger, as the mood among the foreign funds will be rather subdued. in a bid to soften their losses on account of the prevailing situation in Eurozone and elsewhere, they can potentially pull out significantly from India — or, at least, refrain from further exposures.