William Shakespeare used the phrase "It was Greek to me" in Julius Caesar to suggest that a complicated matter was beyond any understanding.
I suspect many people may be muttering those words from Act 1, Scene 2 right now as this week’s Greek tragedy plays out for all to see.
The situation in Athens really is complicated, but it’s also important to all of us. So I thought I would take a walk through memory lane, look at the options, and then consider what it all might mean.
I am also writing this knowing that by the time anyone has read this, everything might have changed, or not, which would be as big a story as if it didn’t, or did… Simple!
Act 1: Where did all the money go?
How did we end up with net government debt at 155% of GDP?
Years of low tax revenues, a pension system that is amazingly complex, with numerous exceptions for different jobs allowing for early retirement, mixed with a large black market economy all contributed to the current mess Greece has found itself in.
Simply the Greek government has far too much debt, €323bn to date, and just can't pay its creditors.
The biggest liability is with Germany (€68.2bn) - which is why they have been the most vocal in all the negotiations - France (€43.8bn), Italy (€38.4bn) and Spain (€25bn), with the rest made up by the International Monetary Fund (IMF), European Central Bank (ECB), Netherlands, US, UK, Belgium, Austria and Finland.
The UKs exposure is a mere €10.8bn wholly through domestic banks and not, unlike others, government loans.
With Greece being among the first wave of countries to adopt the Euro in 2001, members of the European Union, leaders from the EU, the ECB and the IMF have been trying to put together a payment plan to keep Greece from going bankrupt.
Although protecting their own interests is probably more important, a payment plan, regardless of the term, protects their own balance sheet and the integrity of the union.
Negotiators have been pushing Greece to raise taxes further and lower expenses, hoping that these measures, plus nationalising some assets, would help the government in Athens with their debt payments. So far the parties have not been able to reach a lasting agreement because the terms would only inflict more suffering on the Greeks, who already had to suffer many government cutbacks.
Not only that, but pushing up taxes even further would only be counterproductive, sending more trade to its already large black market.
Act 2: So what happens next?
Greece has just missed its deadline to repay a €1.6bn loan to the IMF. And it has now set a referendum for Sunday to allow the Greeks to decide for themselves what to do next.
Once at the polls, the Greeks will tell their government whether to keep working out a repayment plan despite any pain austerity may bring, or continue down the default path, missing more payments over the coming weeks. Most believe this is also a vote on Greece’s membership in Europe.
And if Greece misses any more payments the ECB could kick open the door to allow the Greek banks to collapse, and for the country to leave the Eurozone amid impending economic chaos.
Most commentators believe a NO vote would have such terrible consequences that they can't believe that voters would let it happen.
And if Greece does become weakened, it may have to look to Russia for financial support in exchange for a firmer hold in the Balkans.
Regardless of the outcome, Greeks already have suffered terribly. Their banking system is practically insolvent, the tourism industry is slowly dying out, and poverty is rising.
Act 3 – Just say no!
If the Greeks do bring back their own national currency, presumably with the same name as the old one, the drachma, then the only thing that is certain is a long period of uncertainty and crisis.
This could lead to a very messy series of events, with the ECB probably deciding to cancel all or most of its funding line to the Greek banks on the grounds that it considers them insolvent.
It is likely that this would lead to a considerable period of restrictions on access to bank accounts, as we have already seen this week. It would be incredibly disruptive for the Greek economy, which has already fallen back in recession.
To prevent the banks from collapsing the government would have to start supplying national currency to get the banking system up and running.
So what then would happen to the new drachma? The general assumption is it would collapse in value. That would also pose real threat of inflation as import prices would rise and rise.
Those who see no big deal rightly note that Greece's economy is tiny, around the same size as Ireland or less that half the size of Norway. Other than Kalamata olives and pistachios, there are probably very few products I have bought from Greece? Amazingly the dollar value of U.S.-Greek trade amounts to a rounding error…
Another possibility is a planned and considered, negotiated exit from the euro. That should be slightly less disruptive. But it would still leave Greek bank customers looking at their money being converted into drachma.
One issue with both no-vote scenarios is what happens to Greece's European Union membership, held since the Mediterranean enlargement of Europe in 1975 as they emerged from dictatorship?
I have assumed there would be a Greek exit but what if Greece did not want to leave, with 80% saying they want to stay in Europe? There is no expulsion procedure in place and the consensus is to keep Greece inside the EU even if they have to give up on keeping it in the Eurozone.
And if Greece does leave, what are the implications for the integrity of the rest of the Eurozone? Maybe other economically weak European countries, like Spain or Italy, also could throw in the towel. That would be a real threat to the euro, making its future look even less certain, driving down its value and boosting the dollar. When the dollar gets too strong, American exports will get much more expensive and it will affect the whole global marketplace.
Act 4 – The last minute deal
One route certainly preferred by the creditors is the last minute deal. Everyone is looking for a political breakthrough: a deal is done, and Greece will stay in the Eurozone and pay its debts.
Conversations are still continuing and there appears to be some possibility of an agreement in the coming days.
If renegotiating the current deal at less preferential rates was the price of keeping Greece in the fold, most Eurozone governments would probably grudgingly pay it, though some would have to deal with truculent national parliaments.
The fact is Greece will most likely stay… Why?
The Greeks want to stay in the Eurozone and their creditors want them to stay.
The consequences of them leaving in the European markets are relatively small and been over played by many in the media. The long-term effects on the Eurozone and the wider global economy however, can’t be underestimated.
To be continued…
