One can describe the position of the current Greek government regarding the country’s future with the words «neither war, nor peace», if by war is meant Greece’s departure from the eurozone and by peace is meant the country’s continued presence in it. Irrespective of Greece’s position in the EU, however, a departure from the tough recommendations of foreign creditors is possible. That the latter alternative is an option is suggested by the humanitarian crisis law introduced by the new government of Greece, which provides for a number of social measures totalling €200 million. The law offers food stamps and free electricity to the poor, and what is remarkable is that the law has been adopted without the consent of foreign creditors. The law has sparked a violent reaction in Brussels (the European Commission), Frankfurt (the European Central Bank) and Washington (the International Monetary Fund), while the German newspaper Bild called the law «a declaration of war on European creditors».
It is possible to expect that one of two things will happen in the next few days (and in no more than a week): either Athens will have to recall the humanitarian crisis law, or the ‘big troika’ (the EC, the ECB and the IMF) will take punitive action against Greece. The cost of the law (€200 million a year) is not that big, but it is a precedent that could inspire Greece and other debtors to the ‘big troika’ in Europe to carry out new acts of disobedience.
It will be difficult for Athens to stand up to the ‘big troika’ but by no means hopeless, and there are at least two reasons for this.
Firstly, Brussels, Frankfurt and Washington are not the only pebbles on the beach for the Greek government. Athens can and should search for solutions beyond the borders of the eurozone and the European Union. Venezuela, for example, has been under huge financial and economic pressure from the US, but it recently became known that China is extending a long-term loan of $20 billion to the country to develop its oil industry. Greece could get a good impetus for development from cooperating with Russia. Even Greece’s refusal to take part in the economic sanctions against Russia has already breathed life into the country’s economy, especially its agriculture. It has been reported that Greek Prime Minister Alexis Tsipras is to visit Moscow at the beginning of April.
Secondly, the position of the ‘big troika’ is becoming increasingly precarious. It is true that the level of Greek sovereign debt is definitely high, at 170 per cent of GDP (2014), but in many EU countries the picture is not much better. In 2013 in Italy, for example, this figure was equal to 132.6 per cent of GDP, and in Portugal it was 129 per cent of GDP.
When assessing the situation, it is important to not just bear in mind the level of sovereign (state) debt, but the overall picture of external debt as well. Although it cannot be denied that Greece’s external debt is high (it was 234 per cent of GDP at the end of 2012), here the Greeks yield the palm to many other EU countries. The relative indicators of external debt for certain countries of Old Europe (% of GDP) are as follows: Switzerland – 417; Great Britain – 396; the Netherlands – 360; Belgium – 338; France – 236; and Portugal – 232. What’s more, the external debt of the EU’s engine, Germany, is not that insignificant either at 159 per cent.
With the debt and financial situation the way it is, Brussels (EU), Frankfurt (ECB) and Washington (IMF) can hardly risk making drastic decisions regarding Greek debt. After all, the response could be a declaration of default on the Greek government’s obligations, which total around €320 billion. It would be more than enough to cause a chain reaction involving the bankruptcies of European banks and companies which, in turn, could bring on government defaults and the collapse of the house of cards known as the European Union.
Both Athens and Brussels are frantically searching for unconventional ways out of the current situation. The European Commission unexpectedly called to mind Cyprus, or rather how the banks there were saved two years ago. Why not take on board the 2013 experience with Cyprus when solving Greece’s current problems? Let me remind you that as a result of the Greek debt restructuring in 2012, the banks, companies and funds that had been holders of large blocks of Greek Treasury debt securities suffered tremendously. The decision was then made to ‘discount’ approximately half of the demands of holders of Greek securities. This hit Cypriot banks hard. Neither the Central Bank of Cyprus, nor the ECB, nor the EC were going to help the banks of this island nation. The ‘big troika’ decided to save the banks by means of investors (deposit and other account holders). In actual fact, this was the confiscation of clients’ money (you can find out more in my article «The confiscation of bank deposits as a global perspective»).
At present, Greek banks are in exactly the same sorry state as the Cypriot banks were at the end of 2012-beginning of 2013. Their assets include large blocks of Greek debt securities that are depreciating rapidly. The Greek government is unable to save the banks. ECB president Mario Draghi has stated that he will not refinance the Greek banks against Greek government debt securities. The bankruptcy process of Greek banks must not be left to chance, however, since it could have a ricochet effect on the banking systems of neighbouring countries. In March, therefore, the European Commission suddenly suggested imposing control in Greece over cross-border capital flows. Not too long ago, the freedom of cross-border capital flows was considered to be the cornerstone and the central dogma of financial liberalism. Countries that dared to violate this principle were severely dealt with by the IMF and the US.
Now, however, everything is starting to resemble the Cypriot scenario. Severe restrictions on capital flows were also introduced there in the spring of 2013. It was done so that the clients of Cypriot banks would not be able to avoid fulfilling their sacred duty of saving the banks. I think that the same motive was present in the EC’s March initiative on Greece. The outflow of deposits from the Greek banking sector overseas is increasing, reaching €350-400 million on some days, and the EC’s statement regarding possible foreign exchange restrictions has only accelerated the flight of money. According to the rules of the EU, however, foreign exchange restrictions can only be introduced at the discretion of its member countries’ governments. Athens has not yet mentioned this option. In the meantime, the flight of investors’ money from Greece is continuing, and the risk of large-scale bankruptcies for Greek banks is growing. The Cypriot scenario in Greece is still possible until the end of the spring, but in a few months it will be too late – the deposits will have been reduced to nothing.
The ‘big troika’ does have another idea, however, which is to bring Greece to its knees once and for all. The essence of the idea is simple – to subject the restructuring of Greek debt carried out in 2012 to an audit. Let me remind you that in 2011, the ‘big troika’ promised Greece an aid programme totalling €130 billion. A condition of the aid was the restructuring of Greek sovereign debt. The restructuring only applied to that part of the debt that was issued in the form of Treasury securities and the holders of which were private entities. The largest Western funds and banks agreed to write off 53.5 per cent of the principal on the securities, which is the equivalent of $107 billion. It was the biggest restructuring of government debt in history. The debt noose around Greece’s neck then grew even tighter. In 2012, the level of sovereign debt was 157 per cent of GDP, but by 2013 it had jumped to 175 per cent.
The Greek restructuring took place against the background of dramatic events in a different part of the world – Argentina. This country also restructured its sovereign debt in the past ten years, but it became clear over time that a few of the holders of Argentine debt who had not agreed to the restructuring terms were beginning to destroy the agreements that had been reached. The affair ended up in court and, in 2012, Argentina’s debt restructuring scheme that had been successfully worked out over several years began to collapse under the blows of financial vultures – investors who buy up debt securities on the market for a pittance and then, through the courts of the US and the UK, demand payment at face value, so at a rate of 100 per cent, in other words. This phenomenon has come to be known as «legal imperialism». At present, financial vultures have driven Argentina into a corner and the battle has entered a critical phase.
It is impossible to rule out the use of similar methods to put pressure on Greece. In 2012, the ‘big troika’ ignored the opinion of this small group of private investors who did not agree with the terms of the restructuring (according to our estimates, they accounted for no more than 3 per cent of the Greek debt), but the situation could change dramatically in 2015. One can expect that the ‘aggrieved’ investors will suddenly get the opportunity to express their outrage in the media and the doors of European courts and lawyers’ offices will helpfully swing open for them. Should the court rule in favour of the ‘aggrieved’ investors, then everything will be able to resume its course and the previously written off €107 billion will be added on to Greece’s current debt of €320 billion. Should this happen, Greek sovereign debt will be closer to 230 per cent of GDP.
I am not saying that this is exactly how things will happen, but there is a strong possibility that the Argentine scenario will be repeated in Greece. One can only hope that the Greek government will scrutinize the experience of Argentina, which is being forced to stand up against international financial predators that have forced the country back into the debt trap it had only just started to fight its way out of.