What will happen in Greece?
Since the Syriza Party took power in the Greek Parliament, I’ve been asked this questions multiple times while out and about. The only basis for people asking me the question is that I have a Greek last name; though I was born and have lived almost my entire life in the United States. I’m certainly not an expert on the intricacies of Greek politics, but I can see the positioning of the various parties in the showdown between Europe and Greece. My opinion is that Greece will most likely gain very little in their negotiations, and the situation will continue largely as it has been.
Greece has the problem of negotiating with a very weak hand and they must convince all other EU partners to accept changes to the bailout, an unlikely event, and reduce the debt load, another unlikely event. There’s really no upside for Germany, the Netherlands, or Finland to offer Greece a haircut on the debt except for some good karma from doing it. Greeks are rightly very upset with the economy and austerity, and have elected a Government that promised to remove the debt overhang from them.
The ECB is already tightening the screws when it comes to financing Greece, basically demonstrating that they will not negotiate new terms just because a more radical party was elected. The new Greek Prime Minister, Alexis Tsipras, has already backtracked on a number of demands he originally made, demonstrating just how weak his negotiating position is. The new Government really only has a couple paths it can go down:
- Continue under the current conditions that were negotiated before, with a few small concessions to let Mr. Tsipras save face a bit. The ECB and rest of the EU are not going to make large concessions to a small country such as Greece, as it’s not really in their interest to do so. Greece will most likely continue to have high unemployment and barring a great economic boom, may take a generation to really recover to normal economic conditions. If Greece made some major structural reforms that were attractive to outside investors, they could potentially attract investment and improve the economy; though this is unlikely with a far left party in power and only so much happened when a center-right party ruled.
- Default on the debt. This would leave the country and its banks with virtually no access to capital except what is in the treasury and on hand at the banks. There would likely be a push for Greece to exit the Euro since they would be in violation of the Euro requirements, though this may take some time. The Drachma would then be reinstated with a severe depreciation occurring immediately. This would result in severe real wage losses, spikes in the costs of imports, and if bank accounts are re-denominated in Drachmas, a large loss in savings to those who haven’t moved their money outside the country. The ruling party would face riots, violence, and anger far worse than anything that has occurred thus far; not a desirable position.
Since default is such a bad option and everyone knows it, my belief is the Government will come around to the reality that they have little choice but to continue with the bailouts pretty much as they are. You can see this on a daily basis as the new Government keeps backpedaling little by little from their demands, and it’s apparent how weak the position is they are negotiating from. Best case is that Greece can get some sympathy from other Euro states and come to a position that helps Greeks a bit and is satisfactory to their lending countries.
Originally published Feb 6, 2015 by Zack Sionakides on LinkedIn
