Playing with Fire: Greek Tragedy Reaches Climax

As the Greek tragedy nears its climax – now scheduled for next Thursday – European stock and bond markets took a hit with investors scurrying for safety and protagonists hurling verbal abuse across the stage. In Athens, Prime-Minister Alexis Tsipras lashed out at the country’s creditors, accusing them of political machinations aimed at perpetuating the plundering of his nation. Unfazed, the prime-minister assured that his government will patiently wait for cooler heads to prevail and realism to set in.

However, the vice-chairman of the Slovenian finance committee, Jozef Kollar, on Monday seemed utterly unimpressed. He also lost his cool and accused Greece of “swindling the world.” Mr Kollar enjoys somewhat of a reputation for his off-the-cuff remarks. In 2010, he almost managed to single-handedly block the implementation of the European Financial Stability Facility (EFSF), the bailout fund that preceded the European Stability Mechanism (ESM) launched in 2012 to underpin the euro. Only after he was reminded that tiny nations should perhaps moderate their tone of voice did Mr Kollar regain his sense of proportion.

“In Athens, Prime-Minister Alexis Tsipras lashed out at the country’s creditors, accusing them of political machinations aimed at perpetuating the plundering of his nation.”

Meanwhile in Germany, Vice-Chancellor Sigmar Gabriel – until now deemed a friend to Athens – warned the “game theorists of the Greek government” that they are in the process of gambling away their country’s future. Mr Gabriel added, rather ominously, that his country will not let itself be blackmailed into underwriting “exaggerated electoral pledges made by a partly communist government.” Ouch.

With the rhetoric escalating to unseemly heights, market analysts and other assorted pundits are at a loss to explain the events surrounding the euro – let alone offer some perspective. This much, however, is clear: for all the angry words, nobody has yet told the Greek to embark on a hike or found the courage to cut the Gordian knot.

Talks between Greece and its creditors have been ongoing since late 2009 when the Great Recession laid bare the structural inadequacies of the country’s economy. So far, the Greec has received almost €240bn in bailout funds. All but a tiny fraction of this cash never actually reached the depleted state coffers in Athens. Instead, it was used to swap old non-secured debts, mostly held by privately-owned banks, for new bonds backed up by iron-clad guarantees from Eurozone member states, the International Monetary Fund (IMF), and the European Central Bank (ECB). In effect, private banks were taken off the hook, replaced by taxpayers in a classic case of privatise the profits and socialise any losses.

Therein lies the clue: for want of €2bn – the sum of additional expenditure cuts now being imposed on the recalcitrant Greek in return for a resumption of the bailout programme – European taxpayers risk losing all. Prime-Minister Tsipras has not embarked on a flight of fancy: his allegation that demands for yet more cutbacks is motivated, not by economic considerations but by political spite rings true.

Negotiations stalled over the Greek government’s refusal to further increase VAT rates on electricity, food, books, medicines, and other essentials – a suggestion expected to net the state an extra €950m annually. The Tsipras Administration also rejects reducing old age pensions still further.

Following the money trail, Greece sliding into default and out of the Eurozone would impose massive losses on the creditor nations. Germany’s exposure amounts to €56bn in bilateral loans plus its slice (27%) of ECB funds. France stands to lose €42bn while Spain, beset by its own woes, backed Greek securities worth €25bn. With that money at risk of dissipating into a great Hellenic void, heads are sure to roll should Greece be forced into default.

While the recriminations flying about may be dismissed as so much hot air, the risks to Europe’s financial stability and well-being are real. So are the delusions: the idea that Greece may one day be able to grow its way out of its colossal debt is rather disingenuous. To expect the country to rekindle its battered economy through yet more austerity, as German Finance Minister Wolfgang Schäuble does, borders on the insane.

Prime-Minister Tsipras has asked the creditor nations to display a modicum of realism when making demand on Greece. The request seems reasonable enough in light of the humanitarian crisis unfolding in the country.

Whichever way the conundrum is looked at, the plain fact remains that for want of €2bn Europe risks undermining its maligned, but all the same cherished, single currency. The markets will surely start questioning the premise on which the euro was erected; namely that once in, no country can revert back to its previous currency without also turning its back on the European Union. There is no exit mechanism.

Once the taboo on ditching the euro has been broken, how will markets feel about the prospects of other weaker members of the monetary union such as Spain and Portugal? How will anti-austerity forces fare politically, once it becomes clear that in times of trouble the euro may be discarded?

Though Greece may not represent much in the grand order of all things European, the country’s fate can still set a dangerous precedent. And all that because Mr Schäuble and his finger-wagging friends in Brussels insist on extracting an additional €2bn from the long-suffering Greek. Principles now stand in the way of a solution. That holds true for all sides involved.