Make no mistake; the European Central Bank (ECB) has decisively been the game changer for how events are unfolding in Greece. The decision by the ECB to limit the emergency liquidity assistance provided to Greek financial institutions prompted the bank closures, which if they remain will have devastating and escalating effects on their economy. This is forcing the Greek government to reveal their hand, and their lack of experience in negotiations with the Troika is showing that they are as much concerned with remaining in power as they are with getting a bailout agreement. For a crisis that has been five years in the making, the introduction of capital controls has taken events to the new level.
Since Prime Minister Alex Tsipras blindsided his creditors last Friday in announcing a referendum on the terms of the proposed bailout, he has looked to avoid the vote he called for on multiple occasions. This is because a “yes” vote would ultimately cost him his job. In pre-empting that Greece would miss the 1.55 billion euro repayment to the IMF, the Greek Prime Minister in disregard to 5 months of discussions proposed terms for a brand new two year bail out agreement. This was quickly discarded by EU members.
Following being the first western nation to miss a payment to the IMF in their 70 year history, Tsipras conceded his demands to the creditors with only slight concessions for a discounted Value Added Tax for the Greek islands (a popular tourist destination) and less stringent pension reforms. Again the creditors didn’t blink. And it’s the leadership of Germany’s Angela Merkel, whether too stubborn or not, that has not shifted from the standpoint that they will await the result of the referendum as quite simply, the deadline was missed and the offer is now off the table.
The Greeks have backed themselves into a corner, and the results will range from financial hardship to devastating. Hardship as the result of continued recession in accepting the creditors demands for reforms to stay in the euro, and the potential devastation of a Greek exit, reintroduction of a new currency, and depreciation and rampant inflation. It currently remains unclear whether there is a third option and where a no vote prompts a new round of bargaining, and what will be the result.
By missing a payment to the IMF, they have technically not “defaulted.” Rating agency Standard and Poor’s justified this by saying the IMF is not a private creditor, thus the missed payment was not a credit altering event. Investors took another view, however, as the market for Two Year Greek Bonds over the past week have seen their yields surge to over 37 per cent. This then leading us to where we are today as the European Central Bank as well conceded they are lending money in what has become too risky of a scenario and limiting the liquidity assistance to Greek banks.
Capital Controls are very rarely removed as quickly as they are implemented. Iceland, hit by the financial crisis in 2008 is finally beginning plans to remove the imposed barriers 7 years later. In very simple terms, by imposing these limits to Greek account holders to withdraw only 60 euros a day, and not permitting transfers to financial institutions outside of Greece, it is an admission by policy makers that there is no longer confidence in their financial system.
There are a number of themes to draw on with the crisis in Greece, but the most astonishing is simply that a westernized economy now joins the ranks of Somalia and Zimbabwe in purposely missing a payment to the International Monetary Fund. Not only does this redraw the potential framework for the international lender of last resort should other economies face financial hardship, but demonstrates the course followed by populism and brinkmanship and the resulting fallout from bad to ugly.