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Greece: Will a Default Lead to "Grexit"?

Friday, May 08, 2015 By C.J. Polychroniou, Truthout | Op-Ed
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Will the country be forced out of the eurozone? (Photo:Economic Stress via Shutterstock)Will the country be forced out of the eurozone? (Photo: Economic Stress via Shutterstock)

Five years after the first bailout was issued, Greece not only remains trapped in crisis, facing socially unacceptable levels of unemployment and nil growth prospects, but it is now just one step away from a default and a possible exit from the euro.

This is surely not the sort of outcome that the so-called troika of lenders - the European Commission, International Monetary Fund (IMF) and European Central Bank (ECB) - had in mind when they decided to provide financial support to the land of democracy's birth back in May 2010 to prevent a contagion effect to the rest of Europe.

But then again, in exchange for aid, European and IMF authorities demanded a set of austerity-driven policies that have had a destructive impact on Greece's economy and caused a major shift in Greece's political landscape.

In plain language, austerity wrecked Greece's admittedly weak and fragile economy, eventually forcing voters to turn to outsiders for solutions.

The latter would have been a most desirable and welcome development if the political outsiders elected to office had a solution to offer to the country's severe misery - its agony from the austerity-caused depression.

But just like the political establishment parties that ruled before them, they don't.

Syriza, the anti-austerity, left-wing party that waltzed into power on January 25, 2015, with the promise to end austerity, secure a debt write-down, and kick-start the economy, has proven incapable of clear policy thinking and so shockingly inept in governing that it has managed to make a dismal situation even worse.

It is a government that speaks with too many contradictory voices, acting without strategy or vision for the future.

One minute it engages in acts of defiance against eurozone officials, and the next minute it capitulates to Brussels' demands for more reforms and additional budget cuts to secure a short extension of a bailout agreement that it promised to scrap.

Employing equally shabby tactics of strategic opportunism, it plays a game of chicken with Germany and the Brussels eurocrats on debt while at the same time it pays allegiance to the euro and vows to stick to its commitments.

While Syriza's negotiating strategy has been paying off so far in electoral terms, it has alienated Greece's euro partners to the point that they have refused to unlock bailout funding aid, causing a severe liquidity crisis that has brought the country dangerously close to an economic default.

In plain language again, the eurozone's sadistic masters are bent on inflicting more pain on an already badly battered nation and on dictating the course of future events to their own liking.

This is a crisis they created and are determined to have the last word on even if the country sinks to the bottom of the Aegean.

To be sure, Greece's liquidity crisis is much worse today than it has ever been since the debt crisis first broke out.

However, the problem is emphatically not merely eurozone finance ministers not unlocking further aid from Greece's bailout program. The vast bulk of the bailout money goes to repaying foreign debt anyway.

The main problem is that the economy has slid back into recession, and bank deposits are leaving the country's financial system at record pace.

Greece is fast running out of money.

Indeed, the situation is so dire that it forced the Syriza government to seize the cash of the local governments and raid the cash reserves of state pension funds, moves that were widely opposed and are questionable from a constitutional standpoint.

And, as one senior finance ministry official said, "This is the last bit of cash that the Greek state has."

So, what happens if or when Greece fails in the upcoming weeks to make debt payments to the IMF and the ECB in the event a so-called "honorable negotiation" is not reached with the international lenders?

Will the country be forced out of the eurozone?

If Greece defaults on the IMF, it can remain in the eurozone as long as its euro partners do not demand immediate payment on their own loans and the ECB stands by Greece.

Nonetheless, defaulting on the IMF guarantees that Greece will be indefinitely shut out of international capital markets.

If Greece defaults on the ECB, the potential of a Grexit increases substantially since it may decide to pull the plug on the emergency liquidity assistance to Greek banks, although ECB vice president Vítor Constâncio stated recently that a default does not necessarily mean an exit from the euro.

As one can imagine, both Greece and the ECB are in uncharted waters.

Either way, however, whether Greece quits the euro or not after a default - if there is one - will be a political rather than an economic decision made by the powers that be.

And that means the euromasters.

As expected, Syriza has already failed dismally in its quest to change Europe's political economy via a strategy of renegotiation (one of the most ludicrous goals in the history of the so-called radical left!) and Greece will remain in the grip of austerity and debt peonage for a long time to come.

Now, the task ahead for the left is to rethink politics and stop dancing to the tunes of political opportunism as a means of changing the capitalist system.

The views expressed in this article do not necessarily represent those of the Levy Economics Institute or those of its board members.

Copyright, Truthout. May not be reprinted without permission.

C.J. Polychroniou

C.J. Polychroniou is a political economist/political scientist who has taught and worked in universities and research centers in Europe and the United States. His main research interests are in European economic integration, globalization, the political economy of the United States and the deconstruction of neoliberalism's politico-economic project. He is a regular contributor to Truthout as well as a member of Truthout's Public Intellectual Project. He has published several books and his articles have appeared in a variety of journals, magazines, newspapers and popular news websites. Many of his publications have been translated into several foreign languages, including Croatian, French, Greek, Italian, Portuguese, Spanish and Turkish.


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Greece: Will a Default Lead to "Grexit"?

Friday, May 08, 2015 By C.J. Polychroniou, Truthout | Op-Ed
  • font size decrease font size decrease font size increase font size increase font size
  • Print

Will the country be forced out of the eurozone? (Photo:Economic Stress via Shutterstock)Will the country be forced out of the eurozone? (Photo: Economic Stress via Shutterstock)

Five years after the first bailout was issued, Greece not only remains trapped in crisis, facing socially unacceptable levels of unemployment and nil growth prospects, but it is now just one step away from a default and a possible exit from the euro.

This is surely not the sort of outcome that the so-called troika of lenders - the European Commission, International Monetary Fund (IMF) and European Central Bank (ECB) - had in mind when they decided to provide financial support to the land of democracy's birth back in May 2010 to prevent a contagion effect to the rest of Europe.

But then again, in exchange for aid, European and IMF authorities demanded a set of austerity-driven policies that have had a destructive impact on Greece's economy and caused a major shift in Greece's political landscape.

In plain language, austerity wrecked Greece's admittedly weak and fragile economy, eventually forcing voters to turn to outsiders for solutions.

The latter would have been a most desirable and welcome development if the political outsiders elected to office had a solution to offer to the country's severe misery - its agony from the austerity-caused depression.

But just like the political establishment parties that ruled before them, they don't.

Syriza, the anti-austerity, left-wing party that waltzed into power on January 25, 2015, with the promise to end austerity, secure a debt write-down, and kick-start the economy, has proven incapable of clear policy thinking and so shockingly inept in governing that it has managed to make a dismal situation even worse.

It is a government that speaks with too many contradictory voices, acting without strategy or vision for the future.

One minute it engages in acts of defiance against eurozone officials, and the next minute it capitulates to Brussels' demands for more reforms and additional budget cuts to secure a short extension of a bailout agreement that it promised to scrap.

Employing equally shabby tactics of strategic opportunism, it plays a game of chicken with Germany and the Brussels eurocrats on debt while at the same time it pays allegiance to the euro and vows to stick to its commitments.

While Syriza's negotiating strategy has been paying off so far in electoral terms, it has alienated Greece's euro partners to the point that they have refused to unlock bailout funding aid, causing a severe liquidity crisis that has brought the country dangerously close to an economic default.

In plain language again, the eurozone's sadistic masters are bent on inflicting more pain on an already badly battered nation and on dictating the course of future events to their own liking.

This is a crisis they created and are determined to have the last word on even if the country sinks to the bottom of the Aegean.

To be sure, Greece's liquidity crisis is much worse today than it has ever been since the debt crisis first broke out.

However, the problem is emphatically not merely eurozone finance ministers not unlocking further aid from Greece's bailout program. The vast bulk of the bailout money goes to repaying foreign debt anyway.

The main problem is that the economy has slid back into recession, and bank deposits are leaving the country's financial system at record pace.

Greece is fast running out of money.

Indeed, the situation is so dire that it forced the Syriza government to seize the cash of the local governments and raid the cash reserves of state pension funds, moves that were widely opposed and are questionable from a constitutional standpoint.

And, as one senior finance ministry official said, "This is the last bit of cash that the Greek state has."

So, what happens if or when Greece fails in the upcoming weeks to make debt payments to the IMF and the ECB in the event a so-called "honorable negotiation" is not reached with the international lenders?

Will the country be forced out of the eurozone?

If Greece defaults on the IMF, it can remain in the eurozone as long as its euro partners do not demand immediate payment on their own loans and the ECB stands by Greece.

Nonetheless, defaulting on the IMF guarantees that Greece will be indefinitely shut out of international capital markets.

If Greece defaults on the ECB, the potential of a Grexit increases substantially since it may decide to pull the plug on the emergency liquidity assistance to Greek banks, although ECB vice president Vítor Constâncio stated recently that a default does not necessarily mean an exit from the euro.

As one can imagine, both Greece and the ECB are in uncharted waters.

Either way, however, whether Greece quits the euro or not after a default - if there is one - will be a political rather than an economic decision made by the powers that be.

And that means the euromasters.

As expected, Syriza has already failed dismally in its quest to change Europe's political economy via a strategy of renegotiation (one of the most ludicrous goals in the history of the so-called radical left!) and Greece will remain in the grip of austerity and debt peonage for a long time to come.

Now, the task ahead for the left is to rethink politics and stop dancing to the tunes of political opportunism as a means of changing the capitalist system.

The views expressed in this article do not necessarily represent those of the Levy Economics Institute or those of its board members.

Copyright, Truthout. May not be reprinted without permission.

C.J. Polychroniou

C.J. Polychroniou is a political economist/political scientist who has taught and worked in universities and research centers in Europe and the United States. His main research interests are in European economic integration, globalization, the political economy of the United States and the deconstruction of neoliberalism's politico-economic project. He is a regular contributor to Truthout as well as a member of Truthout's Public Intellectual Project. He has published several books and his articles have appeared in a variety of journals, magazines, newspapers and popular news websites. Many of his publications have been translated into several foreign languages, including Croatian, French, Greek, Italian, Portuguese, Spanish and Turkish.


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