Banking on a Grexit

Greek voters have rejected a referendum on the tough austerity terms of an international bailout. So, what exactly is going on, how bad is it, and is it likely to affect New Zealanders?

Here’s what’s going on. The 2008 global financial crisis left a big hole in Greece’s budget, which was already struggling. It borrowed a bunch of money from the European Union and the International Monetary Fund and the European Central Bank. 

They required the Greek government to stop spending so much money, which led to high unemployment (youth unemployment is above 50 per cent) and falling living standards. A new government tried to negotiate a better (less severe) deal, but the banks didn’t agree – Greece has nothing to offer, and they don’t want to set a precedent that other countries with similar loans can follow.

“Greece is falling apart,” writes Dylan Matthews at Vox. “The unemployment rate is 25 percent — down from a peak of 28 — and four in ten children live in poverty. In the wintertime, Athens is overcome with smog as residents too poor to afford electricity burn everything and anything they can to stay warm. The income of the country's rich, once inflation and taxes are taken into account, is back where it was in 1985. The poor are back where they were in 1980.” The Poke also has an “idiots guide” to the crisis.

Now, in a referendum on whether to adopt extra austerity measures in return for an extension of the bailout loans, Greeks voted “no” by more than 60 per cent to 40 percent. And no one really knows what that means now.

Greek Prime Minister Alexis Tsipras said that Greeks had voted for a “Europe of solidarity and democracy,” adding that Greece “has proved that democracy cannot be blackmailed; Greece has made a brave choice and one which will change the debate in Europe.”

“As of tomorrow, Greece will go back to the negotiating table and our primary priority is to reinstate the financial stability of the country,” he said in a televised address.

First of all, Greece shares a common currency with 18 other countries, known as the Eurozone. Eurozone nations are to hold an emergency summit to discuss the vote.

The Washington Post explains that to get the cash it needs, it could either issue a temporary IOU, known as a scrip, or it could print more money.

But if the European Central Bank won't give Greece's banks the money they need, then there are only two ways for them to get it. Otherwise they'll crash and burn. That's to either take it from depositors or to print it. The first option, what's known as a bank bail-in, is what Cyprus did when the ECB stopped propping its banks up two years ago.

But the second option is available only one if Greece has a currency it can print. It doesn't right now. It has the euro. So Greece would have to ditch it and bring back the drachma if it wanted to recapitalize its banks via the printing press. Both of these are painful, of course, but default and devaluation could be less so for the economy.

What that could mean is a Greek exit from the Eurozone. A Grexit (yes, really, that’s what they’re calling it).

Fox reports that German Chancellor Angela Merkel and French President Francois Hollande spoke to each other Sunday night and agreed “that the vote of the Greek people must be respected.”

“But we are more likely to see something along the lines of the state of affairs that’s recently been described as Grimbo. (Greece in a state of limbo),” reports Quartz.com. “Greece’s central bank is expected to request that the European Central Bank expand the emergency liquidity that’s kept the Greek banking system from collapsing amid widespread deposit withdrawals in recent months. A refusal to raise this limit last week is what forced the authorities to close banks, ban foreign transfers, and drastically limit the amount of cash that customers can take from their accounts each day.”

Something's got to give and it's hard to believe that the German taxpayers will be paying the bill for Greece.

This could have a very real impact on the international economy. The Guardian is live-blogging the effect on the Asian markets (they’re down): “The Australian stock exchange fell sharply on Monday’s open, not long after the final vote was counted (not that 100% was needed to see the overwhelming response).”

Here in New Zealand the dollar dropped one percent against the euro to 0.6046, but has since recovered slightly. By midday, the New Zealand sharemarket was down modestly, about half a percent.

Prime Minister John Key told Morning Report he thinks if Greece was saying no to the austerity measures, it should expect that decision to impact on the use of the euro.

“Something's got to give and it's hard to believe that the German taxpayers will be paying the bill for Greece.”