In classic Greek tragedies, the ending was known from the beginning, but no one did anything to prevent them. More than two thousand years later, has nothing changed in the Hellenic country? The tragedy began decades ago when the country did not modernize its productive structure to adapt to the fall of the Berlin Wall, globalization, and the technological revolution. Entering the euro was a flight forward with a disproportionate increase in public and private debt. In 2007, at the peak of the expansive cycle where revenue was at its highest, Greece had a deficit of 7% of GDP and a public debt of 102% of GDP. Greece was governed during that entire period of financial euphoria by New Democracy, the equivalent of the Spanish PP. A nationalist and ultra-conservative party in moral and religious matters that created a machine of power and clientelist networks to perpetuate itself.
In 2010, a new government revealed 10% of GDP in hidden deficit. Eurostat has only sanctioned twice for concealing deficit: Greece and the Valencian Generalitat. Both with right-wing parties belonging to the European PP, which has had the majority in the European Parliament for 15 years. In Valencia, the concealment of deficit was 1% of its GDP. Therefore, the Greek PP members were ten times more irresponsible than the Valencian PP members.
In January of this year, Syriza, a coalition of far-left parties, won the elections. The first thing it did was to agree with Anel, a split from the hard wing of ultra-nationalist, ultra-religious, and anti-European New Democracy. Hollande and Renzi extended a hand to Tsipras from the beginning, but he opted for conflict as a negotiation strategy. And he managed to turn the 18 European partners against him. Only Putin and Gaddafi had achieved this before.
As we have been anticipating weekly since then, Greece was an economy that was bleeding out. Every day, Greeks took money out of their banks, and a good part of that money left the country. The outflow reaches 35% of Greek GDP in 6 months. ?Outside the euro, the economy would have blown up, and they would have had to impose a bank run months ago, as happened in Argentina in 2001. Within the Euro, the ECB has avoided the bank run until now.
Without access to the ECB, banks will not be able to handle the deposit outflow. The Government will also not be able to meet its debt maturities and interest payments, and the country will re-enter default three years after the previous one. Tax revenues will fall, and it will have to break its promises and apply cuts. Argentina did not ask for a bailout from the IMF and did not announce a fiscal adjustment. The exchange rate depreciated by 75%, and GDP plummeted by 11%. There was a bank run, 14 currencies in circulation, and 20% of the population lived on bartering due to the inability to have money to buy food, medicine, and basic necessities. And most seriously, the poverty rate doubled to historical highs of 55% of the population in 2002.
Greek public and private debt is junk bonds, and its bonds are not valid as collateral to obtain loans from the ECB. Banks accessed an emergency loan line with the guarantee of the Greek state, which in turn had the double guarantee of the bailout from the European fund ESM. Without the bailout, the guarantee of the Greek state would be insolvent, and the ECB could not continue financing by statutes.
This is what Tsipras has activated this weekend. The bailout expired tomorrow, Tuesday, June 30, but the Greek parliament has called a referendum for Sunday, July 5. The ECB has decided to freeze the loan line to Greek banks. Therefore, there is little money left to handle the deposit outflow and refill ATMs. On Saturday, there were queues at ATMs to withdraw money, and one in three were already empty. Several banks did not allow internet transfers, alleging computer problems. At the time of writing this note, a Greek bank has leaked that a bank holiday will begin tomorrow. It is the most extreme case of a bank run. In a normal bank run, the banks are open, and a limit is placed on the daily and/or monthly withdrawal of money from each depositor. On holidays, the banks are closed, and nothing can be taken out.
The worst-case scenario has already been activated. As I have explained ad nauseam, there are no measures to stop a bank panic except for a bank run and capital controls. The problem is that you know when you enter a bank run, but you don't know when you leave. And above all, you don't know how much the restriction of credit, the closure of companies, unemployment, and poverty increase. The slowdown in investment and the destruction of employment in the third quarter will be brutal, as after the Lehman bankruptcy in the fall of 2008. The key is how long it takes to stabilize the banking system and put a floor on the closure of companies and the destruction of employment.
The problem is that democracy and the European Union require procedures that make the process much more complex. Tsipras announced the referendum with nocturnality and treachery after an extraordinary government council. His negotiators were meeting with the Troika in Brussels and found out through Twitter. Surely the risk was a government crisis and, what would be more serious, an internal rebellion in Syriza that would put his continuity as prime minister at risk.
The referendum has already been approved in parliament with the support of the ultra-conservatives of Anel and the Nazis of Golden Dawn. And it seems difficult for Tsipras to announce now that he is calling it off. Tsipras has said that he will vote NO to accept the measures proposed by the Troika. If the YES wins, the extension of the bailout could be signed, and Greek banks could access the ECB again. But a political crisis and a possible early election would open up as the government is defeated in the referendum. And no one guarantees that the agreement will stop the deposit outflow.
Everyone would lose with Greece's exit from the euro. Greece would be the most, as it would have a sharp increase in poverty. Then Portugal, the country most vulnerable to contagion. Then Spain and Italy. The first impact would be on the risk premium and, if not stopped, would again cause credit restriction, a third recession, and an increase in unemployment and poverty.
Rajoy is now more prudent and defends an agreement and sides with Hollande and Renzi. It's a pity that he wasn't more prudent in January, being the only president who visited Samaras on an official visit with the flag of Spain behind the official photo that had an impact on all the main world media, especially in FT. And in recent months being one of the toughest countries in the Eurogroup collaborating to reach the extreme situation we are in today. The other irresponsibility was that of Pablo Iglesias going up to Tsipras's last campaign rally and saying "the change starts in Greece and then it will reach Spain." That photo had a much greater impact than Rajoy's and started again the paranoia of 2010 of Spain is Greece. Contagion in a monetary union with perfect mobility of capital is immediate, but if we also provoke the fear of investors with these unnecessary political gestures, the virus of uncertainty spreads like wildfire.
Tsipras should accept the hand extended by France and try to rebuild relations and dialogue with the partners. Schaüble left the Eurogroup like a Miura bull in the San Fermines. The Germans have taken it as a personal affront after five months of negotiation in which they have had the greatest patience unknown since 2010. Merkel has calmed the spirits, but the theses of Schaüble and the hard wing have prevailed, and it is evident that they have lost 5 months with Tsipras. They are the main contributor, and if they don't put in more money, the game is over.
It is possible that Tsipras has crossed the point of no return. We will know soon. If in the end Greece does not leave the euro and signs the bailout, the financial crisis could last a few weeks like that of Cyprus in 2013. If Greece leaves the euro, we would be facing a Lehman Brother squared and also with the restructuring of debt with countries, which greatly complicates the solution.
The Eurogroup issued a statement on Saturday, without a Greek minister present, very harsh asking Greece to apply capital controls to guarantee the stability of its financial system. And also saying that the firewalls of the ECB, the ESM, and the UFSF European funds are prepared to avoid contagion. But if the attack on Portugal begins and in Germany the debate begins in public opinion that our Portuguese neighbors are not complying with the program and questioning that they continue in the euro, it would be chaos. And when chaos arrives, you lose control.
The uncertainty is maximum, and the potential losses for investors would be substantial in case of Greece's exit from the euro. For that reason, this week we should see a lot of tension in the markets with falls in stock markets, an increase in risk premiums, and depreciation of the euro against the dollar?. Last week, the markets played it to the agreement and have been wrong as in roulette. What we economists know is that the toughest financial crises are those that were not anticipated by investors. And summers are conducive to crises as there are many investors on vacation and less liquidity in the markets.
The key is the reaction of the ECB now that with its QE it can buy public debt to stop the contagion to other countries. But not even the Fed with all its artillery could stop the chaos after the Lehman bankruptcy. Let's cross our fingers and hope that there is intelligent life in Greece, Brussels, and Frankfurt. And let's hope that, whatever happens, the European fund maintains humanitarian aid. After the chaos generated by Syriza, it is now more necessary than ever.
José Carlos Díez, Economist
