Several weeks ago, I warned readers to expect turmoil in Greece. As expected, the anti-austerity party, Syriza, was elected in a nationwide election at the end of January. The new Prime Minister, Alexis Tspiras, has promised the voters that the spending cuts, tax increases and other austerity measures leveled on Greece by the “Troika” (the IMF, ECB and the EU) would come to an end.
The austerity measures were agreed to by the previous Greek administration in exchange for a three-tranche, $272 billion bailout, which runs until the end of this month. Until the elections, the Troika was insisting that Greece implement even more measures to reduce the country’s debts and spur economic growth. Now both sides are seeking a compromise.
The Troika has offered to extend the bailout package for several months to give both parties time to come to a compromise. No deal, say the Greeks. Greece evidently has learned that they can cut a better deal for themselves if there is a clock ticking in the background. They are counting on the Troika caving in to at least some of their demands by the end of the month.
As it stands now, Greek banks are already in a jam, since they can no longer use their government’s bonds to borrow funds from the ECB. Instead, they have to rely on their own central bank for emergency funding. Investors have dumped Greek stocks and bond yields have spiked higher as a result. Yet, the panic we’ve seen before under these circumstances just isn’t there.
There is a growing faction within the EU, led by Germany, who believes that a Greek exit from the EU and the Euro is probably the best outcome for everyone. After all, Greece has a long history of going in and out of bankruptcy. Some argue that it was only invited into the original European Union because it was the “birthplace of European Democracy.” Its economy and finances, some argue, were never strong enough to warrant a seat at the EU table.
Others say that it is the precedent that counts: if Greece exits the EU, than others may be tempted to do the same, namely countries such as Portugal, Ireland, Spain and even Italy. All of the above are suffering form their own austerity/bailout deals with the Troika. And this is where it really gets messy. If Greece gets its way, by either renegotiating its debt and the austerity program, other countries will demand the same thing.
At the moment, both sides are still talking in a marathon session that could conceivably last through the rest of this week and into next. Tspiras, who knows full well that the major stumbling block to getting what he wants is a reluctant Germany, is attempting to muddy the water. He is demanding billions of Euros in WW II reparations and unpaid debt from Germany. It certainly plays well with the populace, who have long felt that Germany has never paid their fair share for the damage the Nazis have done. The stoic Germans, pointing to two separate agreements in the 1950s and 1960s, say that issue is a red herring as far as they are concerned.
My bet is that despite all the bluster, Greece needs Europe more than Europe needs Greece. At some point in the near future, Tspiras will back off and agree to some face-saving measures that will give his country a bit more time to get its act together. That may lead to similar measures in the case of other problem countries. End of story.