Dan­gers in Greek de­fault

If the EU na­tion goes broke, the prospect of a re­turn to po­lit­i­cal in­sta­bil­ity is a greater peril for its neigh­bors.

Los Angeles Times - - FRONT PAGE - By Carol J. Wil­liams

When re­ces­sion ex­posed the glo­ri­fied pyra­mid scheme that was Greek gov­ern­ment bud­get­ing in 2009, fear of a global eco­nomic melt­down on a par with the col­lapse on Wall Street a year ear­lier rip­pled through in­ter­na­tional mar­kets.

The bud­get cri­sis was eased, but not be­fore a short- lived panic in the f inan­cial mar­kets. Now, as Greece once again peers over the precipice of ex­pul­sion from the Eu­ro­zone com­mon cur­rency club, mil­lions world­wide are won­der­ing what con­se­quences lie ahead for other coun­tries and in­vestors if, as now ap­pears likely, Athens de­faults on its bailout debts Tues­day.

Econ­o­mists and fi­nan­cial strate­gists seem con­fi­dent that the world will weather the latest cri­sis with min­i­mal long- term dis­rup­tion. Thanks to in­ter­ven­tion plans crafted by the Euro­pean Cen­tral Bank over the last three years, there are cash re­serves for emer­gency lend­ing to other heav­ily in­debted Eu­ro­zone coun­tries and a $ 1.2- bil­lion bond- buy­ing fund to pro­tect the most vul­ner­a­ble in the event that a Greek de­fault sends in­ter­est rates from pri­vate lenders sky­rock­et­ing.

This time around, the greater peril for Greece’s neigh­bors and al­lies is the

po­lit­i­cal fall­out that could fol­low a fail­ure of Athens’ re­volv­ing- door lead­er­ships to al­le­vi­ate the pain from cred­i­tor- de­manded aus­ter­ity mea­sures that have shriv­eled the econ­omy and boosted un­em­ploy­ment to 26%.

The left­ist fire­brands of the Syriza party took power from the con­ser­va­tives in Jan­uary af­ter cam­paign­ing on the prom­ise that Greeks could de­mand debt re­lief but still re­tain the euro as their cur­rency. They have in­stead led the coun­try into a high­stakes stand­off with the other 18 Eu­ro­zone na­tions, which have cut emer­gency cash in­fu­sions to Greek banks, prompt­ing their tem­po­rary clo­sure and a sus­pen­sion of stock trad­ing.

What lies ahead for a coun­try that has al­ready run the ide­o­log­i­cal gamut of po­lit­i­cal lead­ers in re­cent years, with none able to ease the cri­sis, may be a re­turn to the more pro­found in­sta­bil­ity and tu­mult that aff licted Greece for decades be­fore and af­ter World War II — civil war, mil­i­tary coups and dic­ta­tor­ship.

“Will democ­racy sur­vive in Greece? If things get too bad, they’ve tried ev­ery po­lit­i­cal party al­ready and they all screwed up,” said Jim An­gel, a f inance pro­fes­sor at Georgetown Univer­sity’s McDonough School of Busi­ness. He points to Venezuela’s late left­ist strong­man, Hugo Chavez, as an ex­am­ple of a mil­i­tary au­to­crat com­ing to power and “sys­tem­at­i­cally dis­man­tling democ­racy.”

Greece is a mem­ber of the North At­lantic Treaty Or­ga­ni­za­tion. The rise there of an au­thor­i­tar­ian regime, es­pe­cially if Athens drifts fur­ther into al­liance with Rus­sia, would present ma­jor chal­lenges to the unity and func­tion of the Western se­cu­rity pact and add in­se­cu­rity to Europe’s eco­nomic woes.

Greek Prime Min­is­ter Alexis Tsipras has en­gaged his coun­try in a per­ilous game of chicken with its ma­jor cred­i­tors, de­fy­ing Tues­day’s dead­line for pay­ment of $ 1.8 bil­lion to the In­ter­na­tional Mon­e­tary Fund as well as the “troika” of lenders’ con­di­tions for ex­ten­sion of a re­pay­ment plan on Greece’s $ 270 bil­lion in bailout loans. The cur­rent bailout pro­gram ex­pires Tues­day, which will cut off Athens from fur­ther bor­row­ing to pay its in­ter­na­tional obli­ga­tions as well as salaries for gov­ern­ment work­ers and pen­sion­ers due on this last day of the month.

Mon­day was the f irst trad­ing day since Tsipras sig­naled an end to ne­go­ti­a­tions with cred­i­tors Satur­day by an­nounc­ing that the gov­ern­ment was leav­ing it to Greek vot­ers to de­cide whether to ac­cept the ad­di­tional bur­dens of gov­ern­ment spend­ing cuts in ex­change for a new bailout deal. Tsipras called a ref­er­en­dum for Sun­day — f ive days af­ter the dead­lines for avert­ing de­fault and ex­clu­sion from new credit.

Mar­kets dropped world­wide, with ma­jor Euro­pean bourses los­ing 3% of their value and Asian and U. S. traders see­ing shares plunge by 2%. Even so, trad­ing vol­ume was mod­er­ate, a sign that the latest Greek brush with dis­as­ter was fore­seen and un­likely to un­leash wide­spread panic.

The other Eu­ro­zone na­tions con­tinue to call for an eleventh- hour agree­ment from Greece to ac­cept the ex­ten­sion terms laid out dur­ing months of hag­gling with ma­jor cred­i­tors, which in­clude the Euro­pean Cen­tral Bank and the Euro­pean Com­mis­sion as well as the IMF. Lead­ers of the lend­ing in­sti­tu­tions have said a “yes” vote by Greeks on Sun­day to take on the new belt- tight­en­ing could spur new ne­go­ti­a­tions on a deal to keep Greece in the Eu­ro­zone, which a ma­jor­ity of Greeks tell poll­sters they want.

Tsipras and much of his gov­ern­ment, how­ever, are urg­ing Greeks to vote “no” on the new bailout terms, deep­en­ing the so­cial di­vide be­tween those will­ing to suf­fer through more aus­ter­ity to keep the euro and those who think de­fault­ing on their obli­ga­tions will force the cred­i­tors to ease the terms for re­pay­ment.

Whether the ma­jor­ity votes for or against the cred­i­tors’ pro­pos­als, gross dis­sat­is­fac­tion with the cur- rent gov­ern­ment can be ex­pected. A “yes” vote would demon­strate rejection of the Tsipras strat­egy in this sixth year of cri­sis, which may prompt his res­ig­na­tion or spur another mil­i­tary or po­lit­i­cal fac­tion to take over by force.

Un­rest has spread in re­cent days, with ri­val pro- and anti- Europe ral­lies flar­ing in Athens, the cap­i­tal that is home to 40% of Greece’s 11 mil­lion peo­ple. That con­cen­tra­tion of the dis­pute pro­vides a po­lit­i­cal caul­dron for the op­pos­ing camps that could be­come in­creas­ingly vi­o­lent as peo­ple strug­gle with an eco­nomic twi­light zone or sub­mit to cred­i­tors’ de­mands for deeper cuts in pen­sions and public ser­vices. And so­cial dis­or­der could chase away tourism, which had lately been on the rise and ac­counts for at least 17% of the na­tion’s in­come.

Even if Greece ex­its the Eu­ro­zone in a peace­ful and demo­cratic man­ner, a dropout from the experiment to cre­ate a con­ti­nen­tal na­tion­state would deal a blow to the Euro­pean Union founders’ vi­sion of a vi­brant United States of Europe in which the ris­ing tide of growth lifts all na­tional boats.

Fail­ure of the unity experiment, even if now lim­ited only to Greece among the Euro­pean Union’s 28 states, raises the prospect of other coun­tries bail­ing.

“If Greece ex­its the euro, then the idea of the ir­re­versibil­ity of euro mem­ber­ship van­ishes,” Raj Ba­di­ani, se­nior economist at the IHS re­search f irm, wrote in an in­vestors’ note Mon­day. Wor­ries over de­ple­tion of the union and re­treat from its goals of com­mon po­lit­i­cal, eco­nomic and se­cu­rity poli­cies would un­der­mine con­fi­dence in Eu­ro­zone mem­bers’ com­mit­ment to re­form. That would lead in­vestors to in­creas­ingly scru­ti­nize pledges to f ight cor­rup­tion and bu­reau­cracy and har­mo­nize reg­u­la­tions.

Dur­ing the last ma­jor Greek debt cri­sis, soar­ing in­ter­est rates de­manded of other in­debted Eu­ro­zone mem­bers, in par­tic­u­lar Spain, Italy and Por­tu­gal, raised the prospect of con­ta­gion that could tank their economies with un­payable lev­els of debt ser­vic­ing. That is a risk that has been suc­cess­fully averted this time, many an­a­lysts say, be­cause of the emer­gency res­cue pro­grams adopted by the Euro­pean Cen­tral Bank.

South­ern mem­bers of the Eu­ro­zone also have health­ier economies this time around, be­cause their more sta­ble gov­ern­ments ad­hered to the lenders’ for­mu­las for bal­anc­ing their bud­gets and stim­u­lat­ing growth.

“No­body would ex­pect Por­tu­gal and all of the oth­ers to leave any time soon; there doesn’t seem to be enough public sup­port for that,” said Dou­glas El­liott, a fel­low at the Brook­ings In­sti­tu­tion. “But it makes it pos­si­ble to con­sider that in f ive or 10 or 15 years, maybe cir­cum­stances would be dif­fer­ent. So as a ra­tio­nal in­vestor, you’d have to fac­tor that in” in de­cid­ing to in­vest or lend to other strug­gling Eu­ro­zone coun­tries.

The Euro­pean in­te­gra­tion pro­ject will suc­ceed only if all na­tions are will­ing to com­pro­mise, be­cause “no one can get 100%,” Ger­man Chan­cel­lor An­gela Merkel said Mon­day, de­scrib­ing the cred­i­tors’ last of­fer to Greece as gen­er­ous and un­justly spurned. She blamed Athens for the col­lapse of ne­go­ti­a­tions.

‘ Will democ­racy sur­vive…? They’ve tried ev­ery po­lit­i­cal party al­ready and they all screwed up.’

— Ji m An­gel, Georgetown pro­fes­sor

Gian­nis Pa­panikos As­so­ci­ated Press


ATMs draw lines; with­drawals were capped at $ 66.



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