Nothing was posted here so far on the Greece tragedy. I did not touch the issue as there was excellent coverage elsewhere and what the whole issue produced so far was more absurd theater than serious economic policy. But one act of the drama is now coming to a preliminary end and the tragedy may now unfold into something new with potential serious geopolitical consequences.
Greece took up a lot of debt when banks were giving away money without caring for the ability of the debtor to pay back. When that game ran out, some six years ago, Greece could not no longer take up new credit to pay back its old debts. That is the point where it should have defaulted.
But the Greece government was pressed on to pay back the debt to the commercial banks even when it had no money and not enough income to ever do so. Bank lobbyists pressed other EU governments to raid their taxpayers to indirectly cover the banks' losses. These other governments then pushed Greece to take on "emergency loans" from their states to pay the foreign commercial banks.
Nothing of that money ever reached the people in need in Greece. Here is a gif that explains what happened to all those foreign taxpayer loans treats "given to the Greek".
To get these new loans Greece had to agree to lunatic economic measures, an austerity program and neoliberal "reforms", to fix its balance of payments. But austerity has never worked, does not work and will never work. It crashes economies, lowers tax incomes and thereby further hinders a government to pay back it debts. It creates a vicious cycle that ends in an economic catastrophe.
After six years of austerity nonsense the Greece voted for a new party that promised to end the cycle and stop the austerity measures. But the new Syriza government misjudge the situation and the nastiness and criminal energy of the other governments and organizations it was negotiating with. It early on said it would not default and thereby took away its own best negotiation argument. The negotiations failed. The creditors still demand more and more austerity. Now it will have to default but under circumstances that will make it much more difficult for Greece to get back on its feet.
Yesterday the Syriza prime minister Tsirpas, in a speech to his people, called for an end of the blackmail and for a referendum to decide on the way forward:
Fellow Greeks, to the blackmailing of the ultimatum that asks us to accept a severe and degrading austerity without end and without any prospect for a social and economic recovery, I ask you to respond in a sovereign and proud way, as the history of the Greek people commands.
To authoritarianism and harsh austerity, we will respond with democracy, calmly and decisively.
Greece, the birthplace of democracy will send a resounding democratic response to Europe and the world.
Paul Maison of Channel 4 news sees this as a positive and likely successful step. The people will vote no to austerity and the IMF, European Central Bank and various country governments will still keep giving fresh money to Greece. Yves Smith at Naked Capitalism does not believe that this will happen. She calls the referendum a sham. Greece will default and the only thing the referendum will do is to keep Syriza in the political business. She blames Tsirpas for having misjudged the situation and for being unprepared of what is likely to come:
Greek defiance of its creditors will make it more, not less dependent on them in the next year. How badly things turn out for Greece will depend in significant degree on how much they do to ameliorate the impact of the implosion of the banking system, whether they take extreme measures to keep Greece in the Eurozone, and if Greece tumbles out, how much they provide in humanitarian aid and targeted trade financing (most important, for petroleum imports).
Greece should have defaulted six years ago. Tsirpas should have prepared for default immediately after he became premier. He should have used it as a threat during the negotiations. Greece will now have to default in the worst possible situation and with little thought given to the consequences of the default.
But the consequences will not be limited to Greece.There will be consequences for the EU, for NATO and for the political balance in the Mediterranean. Greece may now decide to leave the "western" realm and thereby set an example others could follow.
The German and other European governments promised their taxpayers that Greece will not default and that the austerity program pushed onto it will succeed. They will now rightfully lose some of their political and economic credibility. The Greece default will be a somewhat harsh and expensive lesson for the voters in those countries too. Let's hope that they will draw the right conclusions.