06 Jul 2015 21:30 IST

All that Greek drama

If a compromise between Greece and its lenders is indeed reached before July 20, it will be a triumph of politics over economics

If all that’s been happening in Greece over the last few weeks sound like Greek and Latin to you, don’t lose heart. You’re not alone. You have the Greeks themselves for company! Why, even veteran analysts are struggling to come to terms with the events running up to Sunday’s referendum and the impact of the resounding “no” from the Greek people.

The referendum was over whether Greece should accept the stringent austerity conditions laid down by the ECB and the IMF as conditions for continuing financial support to the embattled nation. As you know, Greece has been embroiled in an economic crisis for the last five years and has been on life support with aid from the EU and the IMF.

The latest crisis was set off by the financiers insisting on pension and tax reforms, apart from other austerity measures, before they extended financial support.

The Greek government, led by the Leftist Syriza party, refused to accede to the demand for further austerity measures and thus began a staring game between Greece and the EU, with both hoping the other would blink first.

Debt default

A $1.5-billion loan repayment to the IMF was due on June 30 but the date came and went without Greece making the repayment. In the process, it bagged the dubious distinction of being the first country from the developed world to default on its debt.

But the default to the IMF will pale into insignificance if an upcoming date with the ECB for €3.5 billion is not met by Greece. A default in repayment on July 20, when an instalment falls due, will force the EU/ECB to stop further assistance; and that means Greece will have no option but to exit the Eurozone — a Grexit, as it is popularly called. With reports saying that Greek banks — which have been shut since June 29 — have just €500 million in cash (or €45.50 for each Greek) left with them, a stoppage of emergency assistance by the EU will mean bankruptcy and, along with it, extreme pain for the Greek people, who cannot access their money with the banks. This is the scene that Greece is now staring at after the “no” in Sunday’s referendum.

Global implications

Logically speaking, after Greece’s rejection of the conditions set by the lenders for assistance, there is no reason why the latter would agree to bail the country out. Angela Merkel, Germany’s tough Chancellor, has already dashed any hopes of talks after the rejection by the Greek people on Sunday. Germany leads the austerity club in the EU and without its buy-in there can be no rescue package for Greece.

And thus, another round of brinksmanship seems to be starting over the July 20 repayment.

What will a Grexit mean for the world economy and India? Greece accounts for just about 2 per cent of the EU’s GDP and most of its $330-billion debt is owed to either multilateral institutions such as the ECB and the IMF or to agencies such as the European Stability Fund. What this means is that there is no risk of private banks going down with the country as they have very little exposure to Greece. This is a crucial point because the crisis would have assumed very serious proportions had it spread to the banking and finance sectors globally.

There will be turbulence, for sure, in the markets, and the euro will weaken further vis-à-vis the dollar. Global capital flows could be in turmoil and a Grexit might also have an impact on US plans to return to a normal monetary policy. Crucially, there is no assurance that the contagion will not spread to the other troubled Eurozone economies such as Portugal, Spain and Italy. Such an eventuality could prove disastrous for the Eurozone experiment with a single currency. Not for nothing do commentators say that we have now entered uncharted waters after the Greek referendum’s result.

India impact

India has no direct exposure with Greece to speak about; neither is Indian business invested in Greece nor is it a major trading partner. Yet, there could be turbulence washing over Indian shores through the currency and capital channels. There could be some disturbance in the currency markets and a possible appreciation of the rupee versus the euro (which has already been happening) could dent India’s export competitiveness. The EU is, after all, India’s largest trading partner. Turmoil in the financial markets may also lead to outflow of capital from India.

All things considered, economically, what might ultimately tilt the scales in favour of Greece is the political factor. Russia has been fishing in troubled Greek waters and the Syriza has no love lost for the “neo-imperialistic” policies of Western aid agencies. The US has been wary of Russia’s growing influence in Central Europe and the last thing it would want to see is Greece taking refuge in the cosy embrace of the Russian bear.

A compromise might still be worked out between the redoubtable Ms Merkel, who is really the face of austerity in the EU, and the defiant Greeks before the crucial July 20 deadline. But before that happens there will be further sabre-rattling and brinksmanship on view from all sides. If at the end of it a deal is indeed clinched it will be a triumph of politics over economics.