As shocking as it might seem, Greece will survive - July 05, 2015

As shocking as it might seem, Greece will survive

The everlasting acts of this Greek drama slowly trapped the decision makers, the Tsipras government practically hit the wall financially and economically speaking and showed a series of actions that put the country in real trouble. All the austerity measures and difficulties that Greece recently had to suffer was in vain; the GDP growth and primary budget surplus both went to waste in 6 months by populist promises and increasing uncertainty.

What international creditors offered as a bailout also included austerity measures, but those are the kind of rational conditions and reforms that Greece needed anyway to have a future. Complaining about the 25 percent fall of the GDP in the past few years and about how much pain it caused is needless. It was a fake growth that we saw before due to the credits and because the government was wasting money.

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By not being able to agree with the “troika” and by Athens missing IMF payments due 30 June, Greece went practically bankrupt. In addition, Merkel is not interested in Tsipras’ referendum ultimatum either. It rather seems as if they were also waiting for the outcome of the events. As a result, on Tuesday, Tsipras set to capitulate, he is willing to accept the troika’s agreement. Too late, no one consider the Greek government as a reliable and trustworthy partner anymore.

Tsipras is now trying to calm things down: voting “no” won’t automatically mean leaving the Eurozone, however, the capital controls and closed banks, taken effect 29 June, do frighten the Greek and will probably vote yes, i.e. the significant economic austerity measures (and a possible change of government).

If “no” votes win and Greece goes bankrupt so they turn the offer of the international creditors down, there is no other way than quitting the Eurozone. The only reason that the bank system has not collapsed yet is that the European Central Bank’s emergency liquidity (ELA) is providing to keep the financial system afloat and made possible that since last November €44bn and in the last two weeks more than €8bn be withdrawn from the Greek banks by the private customers. If ELA freezes the emergency liquidity without having an agreement, then there won’t be any euro either so a new currency must be introduced (for example drachma) to keep the financial system alive in Greece and to be able to pay the salaries etc. Introducing new currency is only possible with its sharp depreciation (50-60%).

This solution does not bother the markets as much as it had bothered them during the times of sovereign debt crisis. Although the Southern periphery might seem the most liable to this kind of infection, their yield rates haven’t increased much. If Greece fails to agree and quit the Eurozone, this can lead to unexpected events on the markets but as many hopes, it is possible to make an agreement that can hold the Eurozone together. Otherwise, the bond market will very soon change and a possible short term instability is expected. Volatility would rise on the stock market as well as depreciation but all in all, the economic foundations of Europe have improved recently, and there is an economic growth.

Letting Greece go would be much easier now. That is because the 80 percent of their debt is in EU-ECB-IMF hands and its economy counts no more than 2 percent of the Eurozone’s economy. Besides, its bank system does not risk the other members anymore.

The only risk is that if Greece quits, this can give a precedent to the other members but it can surely be avoided by political instruments.