Wednesday, November 1, 2017

Greek Debt Basics: Part II - Educating Alexis

The summer and early fall of 2015 would go down as one of the most agonizing, cliff-hanger, hand-wringing periods in Greek economic history.  The recently elected left-wing government led by the inexperienced forty-something Alexis Tsipras deluded itself  that it could bend the entire EU to its own economic theories and political wishes.  During one particularly memorable campaign speech Mr. Tsipras promised that "We will play the drum and markets will dance to our tune".

Some notions were downright ludicrous: there were rumors of a raid to the country's ECB cash depot, the President of Parliament held public hearings intending to declare all Greek debt "onerous and illegal", ministers flew to Moscow and Caracas seeking emergency loans. As he admitted later, then Finance Minister Yanis Varoufakis even  planned to issue IOUs in lieu of salary and pension payments.  Negotiations with the country's official sector lenders (i.e the Troika) broke down completely.   Bank customers panicked and withdrew over 40 billion euro (a massive 22% of all deposits) from their accounts within months.

Feeling politically cornered, Mr. Tsipras resorted to a Hail Mary pass: he announced a national Yes/No referendum, ostensibly on the merits of the lenders' proposals that were presented as a take-it-or-leave-it package.  Strict capital controls were quickly imposed, severely restricting cash withdrawals and remittances abroad.

Calling the referendum was an amateurish, last-ditch  blackmail move - and it backfired badly.  Every European official from the German Finance Minister on down made it very clear that Greece, if it so chose, could throw itself out of the Eurozone and into the financial and social abyss - and good riddance.

On voting day Greeks made things even worse and chose NO by a large margin, i.e. to reject the Troika's bailout plan.  Things looked really grim. As referendum results came in Mr. Tsipras realized that his game was up. A couple days later, during a marathon session with European leaders in Brussels, he had his first tough lesson in financial realism - and took his first step away from what he himself later described as “illusions”.

He reshuffled his government and called early parliamentary elections, keeping all of the really radical leftists out of the candidate lists.  A new, much more competent and realistic Finance Minister was appointed and given the go-ahead to quickly apply the Troika’s fiscal requirements.

Alexis Tsipras was out of kindergarten. be continued....

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