What is the Greek referendum? How did the crisis there start? What
next? Will India be impacted? IANS presents a primer on the crisis that
is rocking not just Europe and its currency but also threatens to spill
over to the global economy:
What has been the root cause: In many
ways the present-day crisis can be attributed to the single currency
introduced in 1999, the euro. Greece has been a member since Jan 1,
2001. This, no doubt, increased trade within the European Union, but
also jacked up the labour costs in countries such as Greece, making
their exports relatively uncompetitive. This continued to widen the
country's trade deficit and shook government finances.
What is
the current crisis: Also known as the Greek Depression, the present-day
crisis actually started in 2009 mainly as the result of several
inter-linked factors. These included high structural deficits of the
government for around a decade, when the government thought it could
spend its way to prosperity, the looming recession since 2009, and the
threat of debt default by Athens.
What has been the effect:
Credit rating agencies downgraded the sovereign bonds of Greece to junk
status, making it virtually impossible for the government -- or the
corporate sector -- to raise funds from overseas. Also, since Greece is a
member of the European Union with a single currency in 19 member
countries, it prevented the government from depreciating the legal
tender or printing more notes.
What has been done so far: The
troika of the European Commission, European Central Bank and the
International Monetary Fund approved a 110-billion euro bail-out package
for Greece in May 2010 with some conditionalities, so that Athens does
not default on payments. A year later, another dose of 130-billion euros
was thought necessary and this was approved in February 2012. A third
round of concessions also approved, but the fourth and the last one that
came up for discussions last year came unstuck due to elections.
Why
did the packages fail: Actually, since the last quarter of 2014, there
were ample signs of an improvement in the Greek economy -- the
unemployment rate declined and so did the deficits. Greece also managed
to access the global debt market for the first time since 2009. But the
premature elections called in December 2014, and the refusal by the new
government to accept the conditionalities, led to the troika suspending
all its support. Once again, the cycle of crisis re-surfaced.
Why
a referendum: Even as it declined to accept the previous conditions of
the troika, the new government under Prime Minister Alexis Tsipras
continued to negotiate the subsequent course of action. There was hope.
That was at least the case till June 25. But in a dramatic turn of
events Tsipras said on TV two days later that a referendum would instead
be held on July 5, seeking people's verdict on whether to accept or
reject the proposal of the troika. The government also suspended trading
on the Athens Stock Exchange and closed all banks till Sunday, while
limiting the withdrawals from ATMs at 60 euros per day.
What is
the referendum: The text reads as follows - Greek people are hereby
asked to decide whether they accept a draft agreement document submitted
by the European Commission, the European Central Bank and the
International Monetary Fund, at the Eurogroup meeting held on June 25
and which consists of two documents: The first document is called
Reforms for the Completion of the Current Program and Beyond and the
second document is called Preliminary Debt Sustainability Analysis.
Those citizens who reject the institutions’ proposal vote "Not
Approved/NO" [and] those citizens who accept the institutions’ proposal
vote "Approved/YES".
What next: Already, Greek Finance Minister
Yanis Varoufakis has announced his resignation after the “no†vote to
the bailout. The fact that negotiations with the troika will continue is
a given. But the Tsipras government says the no vote gives it more
elbow room at the negotiating table. But that is seen as misplaced
bravado. It is the general belief that a rejection of the proposal by
the Greek people will also mean Greece's exit from the Eurozone -- and
further deepening of crisis.
What it means for Greece: The most
telling impact can be on the financial system, where people will lose
confidence and seek to withdraw every cent they hold in banks. European
banks have already loaned over 100 billion euros to keep the banking
system in Greece afloat. Once this dries up, and people don'e have
access to money, a civil unrest then becomes inevitable. The country
will also face rejection by the global investment community.
What
about Eurozone: Greece's 180 billion euro economy contributes a little
over 1.2 percent to European Union's 14 trillion. But around 315 billion
euros worth of debt is owed by Athens, of which nearly 60 percent is
owed to the European financial system. The country's exit from Eurozone
can potentially shake the idea of 19 countries coming together and
adopting a single currency. In case Greece also defaults on its debt
payments, some other countries will can face a similar crisis. Investor
confidence will be hit and the scramble for retrieving the money can
cause a cascading effect, the fallout of which will hit the global
markets.
The the impact on India: Analysts claim that a Greek
default has been factored in by the markets. That, perhaps, explains why
the Indian equity markets did not crash on Monday. But aftershocks will
linger, as the mood among the foreign funds will be rather subdued. in a
bid to soften their losses on account of the prevailing situation in
Eurozone and elsewhere, they can potentially pull out significantly from
India -- or, at least, refrain from further exposures.
