Under pressure from the troika, Greece buckled. Alexis Tsipras accepted a bailout package of roughly 82 to 86 billion euros in order for Greece to stay in the Eurozone. The final deal was far worse than what was offered to them before Tsipras decided to take a chance and hold a last minute referendum in Greece. It became David versus Goliath tale of who would back down in the end. Would the troika back down for fear of being branded cruel or would Greece buckle under the pressure of possible Grexit and accept any terms that was thrown at them.
The latter happened. Goliath won. Tsipras backed down because he knew that Greece was ill prepared for a possible Grexit as they’ve no central bank, they’ve no new banknotes denominated in the new currency, presumably the New Drachma and logistically it was impossible to implement as former finance minister Yanis Varoufakis wrote in a column for The Guardian in which he says that a Grexit is logistically impossible and Germany knows it and is determined to punish Greece to the breaking point:
To exit, we would have to create a new currency from scratch. In occupied Iraq, the introduction of new paper money took almost a year, 20 or so Boeing 747s, the mobilisation of the US military’s might, three printing firms and hundreds of trucks. In the absence of such support, Grexit would be the equivalent of announcing a large devaluation more than 18 months in advance: a recipe for liquidating all Greek capital stock and transferring it abroad by any means available.
Varoufakis also claims that “bailouts had nothing to do with rescuing Greece (and everything to do with ringfencing northern Europe),” who “had adopted Grexit either as their preferred outcome or weapon of choice against our government.”
In the new ‘bailout’, Greece will submit to reforms and even more public spending cuts immediately.
The reforms include: streamlining the pension system, boosting tax revenue – especially from VAT [sales tax], liberalising the labour market, privatising the electricity network, extending shop opening hours.
Greece has also agreed to set up a trust into which it will place €50 billion worth of assets.
While it will not lose control of the assets immediately, in the long term they will be a way of Greece to eventually pay off the bailout loan, with €25 billion will be used to fund recapitalisation of Greek banks and the other €25 billion set aside to pay off Greece’s massive debts.
The troika knowing that Greece will never be able to repay its loans based just on economic productivity and tax revenues alone, they’ve forced Greece to select some ‘assets’ and put it into a 50 billion euro trust fund for the creditors to tap, and ‘assets’ include sale of Greek islands or handing over some Greek islands to the control of their creditors. This seems to be a cruel joke, it wasn’t enough that the Nazis cruelly occupied Greece during World War II, now it’s happening all over again, under a different set of circumstances.
This bailout agreement is so strict that even some German commentators are voicing concern, ‘there is a fine line between saving Greece and punishing Greece.’ Many believe that this set of bailout conditions could turn Greece into a failed state whereby basic government services expected of a developed nation will cease to exist. Needless to say, Greeks are crying foul and bloody murder. The misdeeds and corruption of their politicians have come home to roost and it’s the people that suffer. The contempt that the Northern European nations and Germany have for Greece is palpable, whereas before it was just hinted at, now it’s all out verbal war. Greece has been declared ‘irresponsible’ by the European Commissioner. Christine LaGarde, the head of IMF said that she doesn’t feel sorry for the poverty in Greece (as opposed to the children in Niger) because Greeks don’t pay their taxes and so they somehow deserve this.
There is no question that Greece is a country that is not only resource poor but poorly managed. Their inefficient labor markets means they rely heavily on imports rather than exporting their goods and services to boost their coffers. The previous Greek governments built a socialist haven on borrowed funds. Tax evasion is rampant, almost a national sport. A nation where over half of the people are pensioners (retirement age is 60) with one of the most generous pension packages in Europe without any tax revenue to pay for it. Benefit cheating is rampant as well, especially disability benefits. An example of such cheating which is symptomatic for the Greek situation is the scandal of the island of blind people. The island of Zakynthos, whereby 650 people are registered as blind, which would entitle them to welfare benefits from the state, and these ‘blind’ people include taxi drivers, shopkeepers, restaurant owners and farmers, people with jobs that would require sight. It is precisely this mentality that erodes any sympathy from Greece’s creditors and the fact that the Syriza government failed to take any responsibility for the failure of the collective Greek governments before them makes their creditors very angry.
On top of the benefit cheating, their refusal to reform their labor market, which is one of the most inefficient, crackdown on tax evasion, privatize their protected industries to make it more competitive is also driving their creditors up the wall.
It is said that by the time the third bailout is enacted, Greece’s debt would balloon to 200% of its GDP, which makes it near impossible to repay without any write downs. It’s estimated that at this rate, there would need to be a write down of 90% in order for Greece to become solvent on its own again, which will never happen. Angela Merkel didn’t grant any other nation a debt write down, so there is no way she could grant Greece the same and also, it’s politically unfeasible.
In a perfect economic scenario, Greece would leave the Eurozone, effect a Grexit, default on the debt denominated in euros, print its own currency and hedge it against the euro, create a Greek central bank to control the currency and then export its way out of debt. The Khan Academy recorded a series of videos explaining how the Greek debt crisis came to be and how it could be solved. It’s explained in economic terms only without any political implications and it goes a long way explaining to the uninitiated: https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/greek-debt-crisis
The future of the euro and ‘European project’ is in doubt, it’s credibility and legitimacy seriously questioned. They’ve integrated the economics and finances of the member nations without integrating them politically and they are trying to solve the Greek crisis with political solutions rather than economic ones. The central bank of any country (such as The Federal Reserve in the US) needs to operate independently from the government. Central banks need to do what it needs to do regardless of the political climate. They need to be able to act unilaterally without consulting government and that’s what’s sorely missing with the European Central Bank. Though it’s called a ‘central bank’, it doesn’t have the power and authority of a central bank. It cannot act unilaterally based on what the economy needs without consulting the individual parliaments of the member nations, which makes economic policies very hard to implement and carry out. And by the time the consent is there, it could be too late.