The Greek debt crisis has been long in the making and is due to a combination of several factors such as mismanagement of the domestic economy, fudging of accounts by previous governments, and onerous conditions imposed by the European Union. Add to this, the sharp divide among the countries of the Union. Those in the periphery — Portugal, Spain besides Greece have been more vulnerable to external shocks. However, unlike Greece these countries restructured their economies in such a way that they are able to withstand contagion.

The euro experiment launched with such fanfare has always been a union of unequals. Keeping the union in tact has involved fire-fighting and crisis management.

Handling the ongoing debt crisis in Greece is without doubt the most challenging of the several acts of crisis management. It brought the union to the brink. The very real possibility of Greece exiting the euro sent shivers not only in Europe but across the world. India’s central governor Raghuram Rajan is right when he says that with India’s direct exposures to Greece being minimal, the country would be able to ride out the inevitable turbulence that GREXIT would have entailed.

Yet, even after a historic agreement between Greece and its European creditors was clinched at the very last minute, the threat to the global financial system is far from being over. As much as Greece other European countries - and in a fast integrating global financial system other countries too - will be watching very keenly as to how the agreement and its numerous clauses will pan out.

The spotlight will now be on the Greek Prime Minister Alexis Tsipras who has had a tough task selling the agreement in the Greek Parliament. The political dimensions to the debt crisis are as important as the economic ones. Tsipras, who heads an elected left-wing government, very recently won a referendum saying 'no' to austerity. But without any tangible options he has had to retract from his strong stance. Reports suggest that faced with dwindling support from his own party he might rope in opposition parties to see the deal through.

That, of course, is easier said than done. The deal with its creditors aims to resolve the crisis and allow Greece to in stay in the euro zone, but involves considerable belt-tightening for its citizens. Taxes are certain to up and some social security benefits will be pared down.

The agreement does not quite guarantee that Greece will receive its third bailout in five years. But it does enable discussions to start for a new assistance package for Greece.

It was expected that Greece would get some relief from its massive debt burden, estimated at around euro 300 billion, by making its creditors agree to what is known as a ‘haircut’, a unilateral percentage reduction in the quantum of debt. But this has not happened, at least so far.

There are doubts whether the European Central Bank will have the confidence to continue emergency funding to the Greek banks.

Forced privatisation

Among the onerous and potentially most contentious clauses of the agreement is the one to force Greece to sell off its assets to create a fund estimated at euros 50 billion to pare down its debt. Privatisation of state-owned assets has a strong negative connotation, especially when brought about by creditors. Another highly controversial provision is to let the IMF monitor and have a say in the running of the economy. These two-forced privatisation and external monitoring - will be particularly unpopular. Their acceptance by Greece only shows the gravity of the debt crisis.

Europe’s fault zone lies in the way political and economic powers are shared by member countries. Most important decisions involving sensitive subjects such as migrants or money are made by 28 national governments, each one beholden to its voters and taxpayers. The introduction of the euro in January 1999 binding 19 countries to a single currency overseen by the European Central Bank aggravated the existing tensions. Fiscal policies-taxation management of debt are left to individual countries. When Greece’s debt crisis began in 2010 banks and cross-border investors liquidated their holdings in the country. The confidence in the country’s banking system is at its nadir.

Financial hole

It would be interesting to trace Greece’s quick descent into the financial hole which it finds itself in. When Wall Street imploded in 2008 Greece became the epicentre of Europe’s debt crisis. A year later, in October 2009 Greece made the stunning announcement that it was understating its deficit figures for long. Suddenly there were big question marks over the soundness of its finances. Global banks drastically cut down their lines of credit. By the spring of 2010 it was teetering towards bankruptcy, which threatened another financial crisis. To avoid such a calamity the so called troika — the IMF, the European Central Bank and the European Commission issued the first of the two bailouts which would eventually touch euros 240 billions. But along with the credit lines came harsh conditions to restructure the economy. Many of these stipulations have continued to cause plenty of pain to ordinary citizens to this day. The tragedy is that the pain inflicted on them will increase.

crl.thehindu@gmail.com

(This article first appeared in The Hindu dated July 20, 2015)

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