Greece’s default on Thursday on a repayment of €300 million to the IMF may have shaken markets, but it is hardly a surprise. In fact, a default of over €1.6 billion due to the IMF for the entire month of June, cannot be ruled out. The fact is that Greece is bankrupt. It relies on loans from the so-called troika — the European Central Bank, the European Union and the IMF — to repay its accumulated €400 billion debt in instalments. The troika extended a support line of €240 billion over the last five years but on conditions of severe austerity, such as cutting back on pensions, social security and government jobs. Greece’s unemployment rate is 25 per cent and the GDP has shrunk by a similar figure over the last five years. It would be challenging for any democratically elected government to continue along this course, particularly one led by the Left-leaning Syriza party. Today, the people of Greece are outraged at their continuing misery for which they hold creditors, private and institutional, responsible. The creditors, meanwhile, are alarmed at the prospect of a domino effect rippling through Portugal, Spain and Italy, in case they take a haircut on the sums owed to them. Their dilemma is that they are also wary of the financial earthquake that would result from Greece cocking a snook at its debt and walking out of the Euro Zone. There is yet scope for a middle ground — for creditors to accept a lower level of dues and Greece to accept a measure of fiscal discipline. The troika has pared the primary surplus target (the difference between taxes and spending excluding interest payments) for the next few years, which is an encouraging sign. But IMF chief Christine Lagarde’s remark that a ‘Grexit’ is on the cards is downbeat — and not without reason.
Greece’s defiance seems to stem from its recent tilt towards Russia and its willingness to act as a hub for Gazprom gas ‘streamed’ through Turkey. A pipeline through Greece for the rest of Europe would earn it the revenues and jobs it needs so badly. By the end of this month, a deal on this score may well be worked out, giving Greece a realistic option to quit the euro. A ‘Grexit’, if at all that happens, will lead to a spike in interest rates and inflation for an already mauled Greece, and trigger bedlam in stock and bond markets the world over. But that’s not the main issue. The Euro Zone will be badly hit if the other fragile countries follow suit. German exports stand to lose the most, as their productivity advantage is bolstered by a common currency and credit-driven purchasing power.
The upheaval over Greece shows that excessive austerity is more likely to kill growth than create the right conditions in terms of interest rates and inflation for investment. India’s fiscal consolidation must be tempered by this realisation. Greece and India are plagued by poor tax collection, cronyism and inefficient governance. Both need reform rather than adherence to economic dogmas.