What’s a Grecian Government Urn?
The situation in Greece seems to be coming to a head, with the Greek people near-united in opposition to austerity, but not apparently sufficiently united on an alternative. The mainstream left has lost ground to a coalition of far-left parties which are totally opposed to austerity. Even the fascists are crawling out of the woodwork, as they typically do at times like this. Meanwhile, the Greek government’s credit rating has fallen from B- to CCC, which is basically a move from “Pretty dodgy” to “Don’t make eye contact”. You’d have to be a born gambler to buy Greek debt now. There’s even a risk of a bank run, and as we all know that never ends well.
It would seem that Greece is, to use the technical parlance of financial analysts, in deep doo-doo. As it stands, if the president cannot form a government, he’ll only have just enough time for a new election before the government runs out of money. That means that Greece will soon find itself in the same position New Zealand was in around 1984, out of money with a brand new government. Only it doesn’t seem likely that things will go as well for Greece, and it wasn’t like it was a smooth ride for us either.
The new leaders of Greece, whoever they may be, will be faced with a stark choice: 1 – Agree to the austerity programme offered by the rest of Europe in exchange for bailouts, 2 – default, or 3 – exit the Eurozone and repay their debt in freshly-printed New Drachma.
Option 1 isn’t really feasible politically, the entire brouhaha in Greece right now is out of the Greek electorate’s opposition to this deal.
Options 2 and 3 are really only different if you have a Credit Default Swap for Greek sovereign debt. Either way bond holders will receive back a small fraction of what they are owed. The morality of sovereign default is of little interest to me (if only because trying to hold a sovereign nation to any kind of moral standard is futile); what I care about is the effect it will have. And the primary effect will be to ensure that the Greek government’s name will be mud in the international bond markets (borrowing with a D credit rating is problematic to say the least), which means under options 2 or 3 the Greek government loses access to credit markets and has to close their primary deficit anyway.
At this stage it’s probably worth emphasising that there are no good options open to Greece. The right way out of this mess was to start raising taxes and/or cutting spending back in 2005 when the economy was still working. But the problems weren’t urgent then, so the Greek government kicked the can down the road. And now there is no more road left.
There are a couple of other possible outcomes, but I’m not numbering them because they amount to “and then a miracle happens” type flights of fancy. The ideal solution would probably be for France and Germany to offer a loan with deferred repayment in exchange for no austerity for another 18-24 months. But sovereign governments can’t form binding commitments and even if France and Germany were willing to play ball, I can’t realistically see the Greek people accepting austerity, even once the economy recovers, assuming the Greek economy actually can recover while it has the Fiscal Sword of Damocles hanging over it.
So if Greece isn’t going to escape collapse, what will happen? The best case scenario is probably: Greece defaults, engages in austerity, and eventually (meaning years) the riots die down and the economy levels out. The worst case scenario probably involves Greece descending into some kind of Zimbabwe-esque hellhole as its government tries increasingly foolish methods of increasing its revenue stream. For what it’s worth, I don’t think Zimbabwe is especially likely, but Greece could still end up a sick man of Europe for a long time. On top of that there’s the prospect of what will happen if Greece leaves the Euro. Since that would be totally unprecedented (there’s not even a legal mechanism to allow it to happen), I’m not even going to speculate on what that could do to their economy, or to Europe.
Finally, I’d like to dwell on what lessons Greece holds for the rest of us. Recall that the best method of getting out of a Greece-type situation is to avoid getting into it. That doesn’t mean European (or American) governments need to starting cutting right now, but every government running a deficit should be thinking about how it is going to balance its budget out, and some countries have less time than others. There is a wide range of tax rates and government spending that are stable, but all of them fall on a high-tax, high-spend vs. low tax, low spend continuum. This is one instance where the long run will arrive before we’re all dead.