LONDON — In the long saga of the euro zone crisis, Greece may be approaching a tipping point. Governments and businesses are starting to make plans for how to manage the country’s possible departure from the euro.
Until recently, European politicians didn’t publicly acknowledge that any nation might abandon the currency. But late last week, Luxembourg’s Prime Minister Jean-Claude Juncker said, “We would like Greece to remain a member, but we’re not saying Greece has to stay a member at all costs.”
This was followed by the news that TUI, Germany’s largest package-tour operator, sent a letter to Greek hotels requesting that they accept payment in drachmas in the event that Greece is forced to return to its old currency.
With Greek politics in turmoil since last Monday, when then-Prime Minister George Papandreou called for a referendum related to the euro zone bailout, sources in the European Commission acknowledge that contingency planning is underway for a possible Greek exit from the euro.
“Plan A through Plans E and F are under discussion,” says a source. But details are not available because a Greek departure from the currency union would be a monumental event.
For example, private banks holding Greek bonds have agreed to take a 50 percent “haircut” on their value. If Greece leaves the euro, their losses would increase significantly, given that the country’s currency would drop sharply. Some European banks would be unlikely to survive that kind of loss. So how do you protect them? Should you protect them?
The other reason it is difficult to figure out how to proceed is that there was never any thought given when the single currency was created to any country actually leaving the euro.
Analysts are looking at the one recent case with some similarities to the situation with Greece.
“You have to look at Argentina,” says German-born Waltraud Schelkle, senior lecturer at the London School of Economics. “It had as hard a currency pact with the dollar as a country could have without unification of the two.”
“One Argentine peso was fixed to be worth exactly one dollar,” recalls Schelkle’s LSE colleague, Ken Shadlen, a frequent visitor to the South American nation. Shadlen remembers people buying coffee at one of Buenos Aires wonderful cafes, getting a bill for seven pesos and paying with both currencies — say four pesos and three dollars.
But Argentina was strangled with un-payable sovereign debts. It defaulted and uncoupled its peso from the dollar in 2001. What happened next wasn’t pretty, recalls Shadlen.
“A week before Christmas, all bank accounts were frozen. This caused riots and mayhem. ”
The accounts were frozen to prevent people from exchanging all their pesos for dollars. When the peso was allowed to float on currency markets, it would be worth much less than the dollar.
In January 2002, the Argentine government declared a unilateral moratorium on debt repayments. There followed three years of negotiations with bond holders before the Argentine government announced it would exchange the old bonds for new paper “worth around 30 cents on the dollar,” according to Shadlen. You can imagine what this lead to: litigation — lots of it. The suits are still unresolved. As a result, Argentina still can’t borrow money on private markets.
Shadlen notes that the parallels between Greece and Argentina are limited. In the midst of its pain, the South American country had one big asset: it grows massive quantities of soy beans, which China imports to feed its people.
Almost immediately following the depreciation of the peso, Argentine soy exports to China soared. The Argentine economy began to grow rapidly. So a violent contraction in GDP was followed by a decade of solid growth.
The problem for Greece is that it doesn’t export much. A fifth of its GDP comes from tourism. It has abundant sunshine, but may already have mortgaged the future of Project Helios solar energy farm to the project’s German backers.
So what lessons can euro zone policymakers learn from the Argentine situation?
If or when Greece departs the euro, its banks will have to close down to prevent depositors from withdrawing euros or wiring their capital to a bank in France or Germany.
Private bond holders who have already agreed to write off half the value of their Greek bonds will be told that they will only get 30 percent of the face value (or even less) of their bonds. If they balk, they will have to be told, “Sue us.”
Since most private Greek debt is held by banks, the LSE’s Waltraud says, “What you have to do is re-capitalize Europe’s banks, but not all of them.” Some hold too much Greek debt and they will have to be allowed to fail.
Currency analyst Stephen Gallo, of Schneider FX, says, “I cannot see how they (euro zone leaders) can let Greece go without simultaneously backstopping the rest of the euro zone countries in order to prevent a domino effect.”
And it’s by no means a sure thing that Europe can come up with the cash to do that, especially with Italy’s debt at more than $2 trillion.
Shadlen jokes, “Presumably someone in Greece is designing a new drachma.”
In the end that is probably the easiest part of the whole process. Everything else is up in the air.
This originally appeared on Robert Reich's
blog Which do you trust more: democracy or financial markets?
Greek Prime Minister George Papandreou decided in favor of democracy Monday when he announced a national referendum on the draconian budget cuts Europe and the IMF are demanding from Greece in return for bailing it out.
(Or, more accurately, the cuts Europe and the IMF are demanding for bailing out big European banks that have lent Greece lots of money and stand to lose big if Greece defaults on those loans – not to mention Wall Street banks that will also suffer because of their intertwined financial connections with European banks.)
If Greeks accept the bailout terms, unemployment will rise even further in Greece, public services will be cut more than they have already, the Greek economy will contract, and the standard of living of most Greeks will deteriorate further.
If Greeks reject the terms and the nation defaults, it will face far higher borrowing costs in the future. This may reduce the standard of living of most Greeks, too. But it doesn’t have to. Without the austerity measures the rest of Europe and the IMF are demanding, the Greek economy has a better chance of growing and more Greeks are likely to find jobs.
Shouldn’t Greeks be able to make this decision for themselves?
Of course, if Greek defaults on its loans, global investors (fearing that a default in Greece sets a dangerous precedent) may yank their money out of Italy. This would almost certainly bust several big European banks – and generate panic on Wall Street. That’s why Tim Geithner has been pressing Europe to bail out Greece.
We’ve been here before, remember? Here in the United States, at the end of 2008 and start of 2009. Wall Street had made lots of bad loans, and the question we faced then was whether to bail out the Street.
The difference is, we didn’t hold a referendum. Instead, the Bush administration told Congress the nation risked “economic Armageddon” if it didn’t immediately authorize a giant bailout of the Street – with no strings attached. Of course Congress hastily agreed. Hank Paulson, Ben Bernanke and Tim Geithner (as head of the New York Fed) then doled out the money. And the Obama administration (with Geithner installed as Treasury Secretary) gave out more.
So instead of allowing the Street to live with the consequences of its negligence, we bailed it out – and allowed the Main Streets of America to suffer the consequences.
If Americans had been consulted about the bank bailout, I doubt it would have happened the way it did. At the very least, strict conditions would have been placed on the banks in return for the money. The banks would have had to eat the losses of the predatory mortgages they sold, and help homeowners reduce those mortgages. They’d be required to improve the capitalization of small banks in communities across the country. They’d be forced to accept stringent new regulations, including resurrection of Glass-Steagall.
But Americans weren’t really consulted. It was an inside job.
As a result, Wall Street has prospered but the rest of the nation hasn’t. One out of four homeowners is underwater, owing more on their homes than the homes are worth.
And with the worst economy since the Great Depression, we’re now embarking on fiscal austerity. Either Congress’s super-committee comes up with $1.2 trillion of federal budget cuts that Congress agrees to – going into effect a little over thirteen months from now – or $1.5 trillion of cuts are made across the board. Meanwhile, states and cities have been slashing public services for the past three years.
So which is it? Rule by democracy or by financial markets? Based on what’s happened in America, I’d choose the former.
Greek Prime Minister George Papandreou announced a referendum on the bailout deal agreed last week, surprising his people but confounding his European partners. The move sent European stock indexes sharply lower. Both the Paris and Frankfurt bourses had lost more than 5 percent by midday.
Papandreou, addressing the Greek Parliament, said, “Let each Greek person decide; with a ballot paper in his hand, let each person decide for his country and for himself.”
Last week it seemed as if the Greek sovereign debt crisis had been more or less settled. Banks holding Greek bonds agreed to a 50 percent haircut — or write down of their value. In return Papandreou agreed to continue the austerity program he has initiated, shrinking the size of the public sector. This includes large scale lay-offs and clawing back of pension promises.
No date was given for the referendum, nor was it clear what the question would be. The Greek constitution allows the president to call referendums only on important, non-financial matters, the Financial Times’ Alphaville blog notes.
Papandreou also announced a vote of confidence in his government to be held later this week.
The Prime Minister’s political opposition, right and left, immediately denounced the plan for a vote. Instead they want the government dissolved and a snap general election called. The next scheduled election is in 2013.
At first glance the referendum is less about the bail-out deal than Greece’s continued membership in the euro zone. Many opinion polls show Greeks are against the punishing austerity as a price for the bail-out. They also show Greeks want to continue to be part of the single currency. But you can’t be in the euro without the bail-out. So in a sense Papndreou is saying to his voters, make up your minds because it is put up or shut up time.
This is another example of how the lack of a political framework to back the single currency at its conception 20 years ago — its democratic deficit — is having repercussions today. It’s something Papndreou referred to directly in his speech, “It is not for others to decide but the Greek people to decide … we have faith in the people. We believe in democratic participation. We are not afraid of it.”
Turmoil in Greece was the last thing the markets wanted.
The euro fell 2 percent against the dollar in New York shortly after Papandreou made his announcement.
Is Greece approaching the end of the line? Judging by a lengthy and detailed article in Spiegel, “Germany Plans for Possible Greece Default,” getting passed around Monday by econobloggers like a eurozone-destroying hot potato, the answer is yes. Germany’s patience — never much to begin with — has run out. There is no way that Greece will be able to keep to the terms of its ongoing bailout, and the support spigot appears finally about to run dry. So one way or another, the country will default. The only question is whether it does so as a member of the eurozone, or as a refugee.
Many observers have been predicting this end game since the beginning of Europe’s sovereign debt crisis, if only because the austerity forced upon Greece by the terms of its bailout has so damaged the Greek economy as to make it impossible for the country to grow at all. But whatever might or might not happen to Greece has never been the primary cause for concern. European banks own lots and lots of Greek debt. What happens to those banks when Greece defaults?
Systemic crisis, anyone? As Spiegel observes, “As the financial crisis showed, banks are deeply interconnected across national borders. If one major bank fails, others can easily be dragged down with it.”
And that of course, was the rationale for bailing out institutions like Bank of America and Citigroup, rather than forcing them into some kind of managed bankruptcy. Now it looks more and more like the world will get a chance to find out what happens when governments decide that they won’t (or can’t) bail out the bad apples.
The consensus view of Europe’s policymakers, as summarized by Spiegel, seems to be that Greece is a basket case that can’t be saved, but that the Greek contagion won’t spread to other sickly eurozone countries. That sounds an awful lot to me like Hank Paulson or Ben Bernanke’s assertions that the subprime mortgage housing woes were “contained.” The big risk of course, is that Greece turns out to be like Lehman Brothers, and a default there leads to meltdown more broadly.
Felix Salmon captures the moment:
“We’re at an inflection point, in Europe, and all the signs are pointing to more chaos and uncertainty. The last crisis brought Europe and the world together, at least briefly. This one is tearing Europe apart.”
It has become fashionable among Republican politicians to warn that if the United States does not speedily get its fiscal act together, it is in danger of becoming another Greece — plagued by impending bankruptcy, riots and general dysfunction. On Sunday, Sen. Lindsey Graham, R-S.C., was merely the latest to sound the alarm.
Graham, in turn, said that the real threat to the nation is the burden of unsustainable debt.
“What is calamitous is the path we’re on as a nation,” he said. “We’re becoming Greece.”
Graham’s assertion is laughable on multiple levels. Steve Benen offers a concise summary:
The U.S. has extremely low interest rates and foreign investors are happy to loan us money; Greece has extremely high interest rates and no one is eager to loan the country money. The U.S. has our own currency; Greece has the Euro. We have a great credit rating (for now); Greece has an awful credit rating. We have a manageable debt; Greece has a debt crisis. We’re a large country with an enormous economy; Greece is a small country with a small economy. We have one of the world’s most stable systems of government (at least until six months ago); Greece’s government structure is a little shaky.
The importance of having one’s own currency cannot be overstressed. The U.S. is in control of its own economic destiny. If need be, the U.S. can always print more cash to pay its debts. Sure, that will cause inflation, upset our creditors and trading partners, and impel politicians like Graham to swap in mentions of hyperinflation in Zimbabwe and Weimar Germany for Grecian debt, but the point is that U.S. has options. Greece doesn’t.
However, upon further reflection, I’m wondering if perhaps Graham was inadvertently speaking the truth. Because if we follow the Republican prescription for dealing with our debt — huge spending cuts in the middle of a slowing economy — we do run a very high risk of becoming Greece.
Greece offers a textbook example of what happens when you enforce austerity measures during a weak or recessionary economy. In March 2010, as part of a bailout deal with the European Union, Greece imposed a radical austerity program, including pension cuts, a four-year hike in the retirement age, pay cuts for public workers, cuts in defense spending, and a raft of regressive tax hikes.
The result was entirely predictable. Unemployment surged: Before the introduction of austerity measures, the Greek unemployment rate was 11.6 percent; in June 2011 — 16.5 percent. A deepening recession depressed tax revenue collections, resulting in budget deficits considerably bigger than had been projected. The all-too-inevitable next step: Another package of austerity measures, designed to ensure another bailout, and guaranteed to hammer Greece’s economy even harder.
We can easily try this experiment at home in the United States. All we’d have to do is fail to raise the debt ceiling, and immediately cut government spending by 40 percent. If we want riots and higher unemployment, just like Greece, that’s exactly the way to go about it.
On a hotel rooftop in Exarchia, a gritty neighborhood known to breed artists and anarchists, a hodgepodge of activists plotted how to breach Israel’s sea blockade of the Gaza Strip. Soaked in Mediterranean sunshine, these warhorses of the Palestinian cause murmured in English, Greek, Arabic and other tongues.
The loose-knit network behind the stranded aid flotilla that has garnered international attention has little to tie it together except a cause, and now it is dispersing after at least two weeks in Greece. Many American activists flew home on Wednesday, and a peaceful sit-in by Spanish protesters at their embassy in Athens was dwindling in size.
Members of this genial Tower of Babel, including veterans of leftist politics, gave formal news conferences in casual attire in the past week to drum up publicity, one of the few tools at their disposal in the face of government pressure blocking their flotilla.
The movement included Dror Feiler, an Israel-born musician who moved to Sweden decades ago; Vangelis Pissias, a professor at the Technical University of Athens; and Jane Hirschmann, a psychotherapist from New York City and member of a group called “Jews Say No!”
There was also a Swedish crime writer, an Irish rugby player and a former indigenous chief from Canada.
“We are people that normally never communicate with each other,” said activist Mattias Gardell, a Swedish academic who has studied religious extremism in the United States. “We disagree heavily on other subjects.”
The band of more than 300 activists ran aground on a Greek ban on their departure from ports near Athens and in the islands of Crete and Corfu, amid warnings from the Israeli military that it would stop any attempt to reach Gaza by sea. As options dwindled, organizers declared victory anyway, citing the attention they drew to their cause.
The bid to bust the sea blockade, which Israel says is necessary to stop weapons reaching Hamas militants who might aim them at Israeli border towns, turned into a cat-and-mouse game, mostly on Greek soil or just offshore whenever flotilla boats made a break for international waters. Greek Coast Guard vessels turned them around each time.
“Maybe if we’re here a bit longer, we will learn the Greek language,” joked Raef El-Ghamri, a native Egyptian who now lives in Germany and helped prepare an ambulance with medicine and a wheelchair for delivery to Gaza’s population. He said a cargo vessel that is supposed to carry the equipment had not been loaded, another sign of how far the flotilla was from achieving its goals.
El-Ghamri wore shorts and a black-and-white checkered keffiyeh on his head in the iconic style of Palestinian leader Yasser Arafat, who died in 2004. He and others waited for days as their plans to sail were delayed over and over, making sure to avoid heavy rioting last week in central Athens over Greece’s economic hardship.
The saga of the “Freedom Flotilla” was more foam and froth than the international crisis that some feared at a time of Mideast and North African tumult. In 2010, nine activists on a Turkish boat died in an Israeli raid on a similar flotilla that went awry as commandos rappelled from helicopters onto the deck in the dark.
Each side blamed the other for the violence.
Israel declared that this year’s flotilla sought another showdown to publicize their campaign, alleging its participants planned to dump sulfuric acid on its soldiers if they tried to board the vessels this time around.
The activists, who are mostly from Europe and North America, recite firebrand phrases about Israel’s “siege” of Gaza’s 1.5 million people, deflecting criticism that they are in league with Gaza’s Hamas rulers, labeled terrorists by the West.
On the surface at least, many adhere to a Woodstock-era message of harmony that verges on simplistic at times. It would be hard to imagine a number of them engaging in lethal combat.
“Exist to Resist,” is one snappy slogan. “Stay human, brother,” is a rallying cry.
Ridgely Fuller, a self-described “suburban housewife,” rallied outside the U.S. Embassy last week to protest the Obama administration’s warning that participation in the flotilla might be a violation of U.S. law. Fuller, who has traveled to Palestinian territories, recalled teaching the “Hokey Pokey,” a clapping, wiggling dance, to children there.
Another of several dozen Americans in the flotilla was 22-year-old Max Suchan, who said he recently learned how to swim with the help of friends in public pools and a lake in his hometown of Chicago.
“I basically could keep myself afloat and doggy-paddle, but I know now how to swim in a more artful, long-term manner,” Suchan said earnestly.
He said he and comrades engaged in “role plays” to prepare for arrest by the Israeli military. The scenarios included “pulling people apart who were linked up” in a passive show of opposition, Suchan said. He intended to take his glasses off in the event of an Israeli boarding so that they wouldn’t get broken, and he had seasickness pills for the trip over.
Some flotilla news conferences resembled religious revival meetings, with activists chanting and holding “Free Gaza” signs. On the podium, French organizer Thomas Sommer-Houdeville drew applause when he said:
“We are not terrorists, we are victims of love!”
Canadian activists, whose boat is called “Tahrir” after the square in Cairo that became a symbol of the Egyptian uprising, urged people back home to put a boat symbol in their office or home windows. They posted instructions on how to make an origami boat on their website.
As late as Tuesday, the flotilla was still trying to stage breakouts from Greek waters, or at least the appearance of them. Concerned about eavesdropping, an activist warned a journalist not to talk on the telephone, instead sending a text message that said the rendezvous was the “Skipper Bar” in a high-end marina.
There, activists huddled as part of a plan to help the “Juliano,” a Sierra Leone-flagged motorboat in the flotilla, make its way out to sea from Piraeus, Greece’s biggest port. On Wednesday, it finally departed with official permission — for another Greek port, not Gaza.
(Credit: Losevsky Pavel via Shutterstock) 
Left: Greek Prime Minister George Papandreou; Right: Tim Geithner (Credit: AP) 
Greek Prime Minister George Papandreou (Credit: AP) 
Activists of Gaza flotilla gathering outside the Ministry of Public Order in Athens, Greece, Sunday, July 3, 2011. Organizers of a Gaza-bound flotilla said Sunday they have not abandoned their plans to breach Israel's sea blockade of the territory despite a Greek government ban on their vessels leaving the country's ports. (AP Photo/Petros Karadjias)(Credit: AP) 
