Greek Suicide Watch Voters in Europe, Japan and the U.S.,Take Note.
http://www.wsj.com/articles/greece-suicide-watch-1435512143
Athens has itself to blame if it defaults and leaves the euro.
The collapse on the weekend of last-ditch talks to extend Greece’s bailout means Athens won’t be able to afford a €1.55 billion debt payment due to the International Monetary Fund on Tuesday, the day the 2012 bailout agreement expires. The European Central Bank said Sunday it won’t increase its liquidity assistance to Greek banks, and Greece ordered banks not to open Monday to avoid more deposit flight.
None of this automatically triggers a euro exit. But it’s hard to see how Greece could stay in the currency bloc for long if it defaults on its debt, refuses to implement fiscal and economic reforms and, in all likelihood, imposes capital controls.
This marks a long fall in the five months since Alexis Tsipras and his far-left Syriza Party were elected on a platform of rolling back reform. Ahead of January’s parliamentary vote, the economy had started growing again after four years of recession and a contraction of around 25%. Athens in 2014 sold bonds to private investors for the first time since 2010 and was on the verge of exiting its 2012 program.
While the 2010 and 2012 bailouts were badly designed—relying too much on steep tax hikes—no one in Athens seems to have thought about where the money would come from to maintain their spending. Syriza campaigned explicitly on a promise to negotiate a better deal with creditors.
Such a deal has proved impossible, although not for lack of trying by creditors. No one wants to be responsible for a euro exit, least of all German Chancellor Angela Merkel. This month the IMF, ECB and eurozone governments offered more lenient fiscal-surplus targets and more leeway for Greece to raise taxes in exchange for more modest pension reforms and other spending cuts.
That’s the most generous offer creditors could reasonably be expected to make in light of their own political and institutional constraints. For all its flaws, it’s also a better plan for the Greek economy than the growth-killing tax increases Syriza wants in order to protect social spending.
Mr. Tsipras has refused the offer, instead proposing a July 5 referendum in Greece on the latest creditor offer. In the best case a yes vote would provide Mr. Tsipras with the political cover to accept the deal and implement reforms rejected by more radical members of Syriza.
But he plans to campaign against the offer, so it’s more likely he hopes a no vote would offer another bargaining chip with creditors, or a political alibi for presiding over a chaotic euro exit. Creditors aren’t playing along, declining to extend the current bailout so Athens can pay its bills through the referendum.
A euro exit would be a tragedy—especially for Greeks. Optimists claim a return to a cheaper drachma would be good for tourism, but that would come with a huge decline in living standards. Greeks who owe debt in euros but suddenly earned income in drachmas would be crushed. Another deep recession would be inevitable.
The impact on the rest of Europe and world financial markets is harder to predict. Some unexpected financial contagion is possible, especially since markets have anticipated a last-minute deal. But Europe has planned for months to contain the damage, and other economies are stronger than they were in 2012. Greece’s debts are now held mainly by governments, the IMF and ECB that can absorb the hit if it happens.
Appeasing Syriza’s demands could spread political contagion to Spain, Portugal and other countries that might think they too can avoid reform and still be rescued. A last-minute reprieve is possible, but if not the Greeks will have committed suicide by ignoring economic reality. Voters in Europe, Japan and the U.S., take note.
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