By Tim Marshall.
Given that the Greeks lied their way into the Euro, and the Euro countries lied when they said they believed Greece, it is tempting to wish a plague on all their houses. However, that would be morally, economically, and strategically wrong.
If Greece cannot pay its debts, and its banking system collapses, followed by an exit from the Euro zone, the first to feel the increased pain will be the Greek people, already suffering economic hardship not seen in the developed world since WW2.
This in turn could further propel Greece towards the extremes of politics, both left and right. In desperation Athens could go, cap in hand, to Moscow which is seeking to increase its influence in the Mediterranean. On Russia’s shopping list would be a permanent warm water port – this seems an unlikely scenario now, but these are uncertain waters.
A Grexit would also be a blow to the European Union as a viable concept. Euro sceptics might welcome that, but reforming the EU is one thing, seeing it unravel and Europe returning to a ‘Balance of Power’ system hardly seems a good replacement.
America’s financial institutions do not have the direct exposure to Greece shared by many European banks, but they would take a few hits. More serious is the knock on effect on the US and others if the European banking system wobbles.
Experts fear that a Grexit could cause investors to pull out of other vulnerable Euro countries such as Italy, Spain, and Portugal. For example, in 2008 when the full extent of how badly run Greek finances were uncovered, the big UK institutions had £12.4 billion tied up in the country. That is now down to £2 billion and falling. If something similar began happening in the other vulnerable countries then savers in those countries might panic causing a run on the banks. There was a small run on the Greek banks last week as it became clear talks to solve the crisis were running into the sands.
The European Central Bank has been ‘war chesting’ in case it needs to buy sovereign debt if say, Spain, gets into trouble thus stabilising the system. If that failed though, it would spark panic in the ‘markets’ which at best of times are nervous, herd like places. A domino effect is a possible scenario, and that would affect banks around the globe.
There are several levels of pain before reaching such a level and the threat of contagious panic has been reduced precisely because so many countries stared into the abyss during the previous serious threat of a Grexit in 2011. But these are the stakes at play in what has been a massive game of poker between the Greek government and those keeping it afloat.
There are three scenarios now.
1 – Both sides blink but pretend not to and Greece staggers on for a few more weeks before the next last chance.
2 – Athens blinks, increases VAT to raise taxes, and cuts pension payments and wages, thus allowing the ECB and IMF to continue funding without losing face. This could cause the fall of the Government.
3 – The creditors cut the funds and take the plunge into the uncertain, murky waters of a Greek default.