Greece – what next?

Join me as I gaze into my crystal ball and attempt to predict what will happen over the next while in Greece. Bookmark this page and come back to laugh at me when my predictions prove to be completely nonsensical.

First up, where is Greece now? Well it is not in great shape. Its public finances are in a disastrous state and its economy is contracting at an alarming rate. It has been unable to borrow on the open markets at affordable rates and instead has been borrowing from a combination of the European Central Bank and the IMF. These institutions have laid down stringent conditions to their loans, which have contributed to Greece's economic decline. But Greece has been a bit slack at meeting its lenders' targets, leading to a certain lack of confidence on their part.

The May 6th election result was inconclusive, largely thanks to a quirk of the Greek electoral system. 250 MPs are elected by proportional representation, but an extra block of 50 seats are given to the party with the largest share of the votes. That was New Democracy, Greece's long-standing centre-right party. Together with PASOK (the old centre-left party) and a small leftwing party a parliamentary majority in favour of continuing with the EU/IMF bailout programme could have been scraped together, but anti-bailout parties clearly won a majority of votes cast. A pro-bailout government would have lacked popular legitimacy and so could not be formed, while an anti-bailout government would have lacked a parliamentary majority. So Greece is calling new elections.

At the time of writing, my understanding is that these elections will happen on either the 10th or the 17th of June. This time I expect that they will produce an anti-bailout majority. Last time, nearly a fifth of Greeks voted for small anti-bailout parties that failed to pass the 3% threshold required to get into parliament. This time enough of them will switch to more popular anti-bailout parties. In particular, I reckon that Syriza, a far-left coalition in some ways akin to the United Left Alliance in Ireland, will finish ahead of New Democracy and pick up the 50-seat bonus. Together with the Communists and perhaps another anti-bailout party or two (but not the Golden Dawn, who are evil) they will form an anti-bailout government.

Things might get awkward if the election results fall in such a way that the far right nutters in the Golden Dawn are needed for an anti-bailout majority in parliament, but I am assuming that this will not happen.

Now, the anti-bailout lot in Greece are not actually against being lent money at advantageous rates by the EU/IMF, they just do not want to have to conform to the conditions attached to the loan. And they may also not want to pay the loan back either. So when they get into government they will basically say: "Keep sending us the money, however we are not going to stick to the austerity conditions agreed with previous governments". Their possibly naïve assumption is that Greece can tough it out with its creditors, because at the end of the day Greek bankruptcy would hurt the other European countries so badly that they will keep the money tap on to prevent thishappening.

The next tranche of bailout money is due to Greece in the middle of June, at the same time as the elections. If that money is not paid over, Greece will be bankrupt; apparently there is a possibility of the Greek state going bust even before then. My prediction is that one way or another, Greece will find itself with an anti-bailout government and no bailout money – the people who are stumping up the money for Greece (primarily Chancellor Merkel of Germany) would rather take the hit on the country leaving the Euro than give more money to a government that is repudiating the bailout conditions.

Things will then get very messy very quickly. With no one lending to it, the Greek government will only be able to spend money it can raise itself in Greece. This is not nearly enough to cover its expenditure (if it was, the Greek state would not need a bailout). It goes without saying that it will then be in the situation they call messy default – abruptly telling its creditors that they are not going to be getting any more repayments any time soon, if ever. But the problem for Greece is that it is running a deficit on current spending – the money it pays to state employees, social welfare recipients, and the other recipients of state spending is way more than what it is raising in taxes. With no bailout money it will have to start defaulting on these payments as well.

Now, in the normal run of things, if you are a country's minister for finance and you cannot borrow money and are spending more money than you are taking in there is only one thing you can do – print more money. Greece is in the Eurozone and cannot print more Euros. I think the only way around this conundrum is an abrupt introduction by Greece of a new currency, a neo-Drachma or some such. The Greek government will be able to print this up to their hearts content and pay people as much of it as they like. Perhaps initially the neo-Drachma will be a parallel currency with Greece still notionally in the Euro zone, but I reckon that the introduction of this banana money will drive the Euro out of circulation and lead to an effective Greek exit from the Eurozone.

Why will the Euro drop out of circulation in Greece? Well, the Greek government have introduced the neo-Drachma to get around the imbalance between its revenue and expenditure. Instead of cutting back on expenditure (easier said than done in a country as depressed as Greece), it will print money to make up the difference. But this gross expansion of the money supply, backed by nothing except the Greek government's not very convincing claims to be setting the country on a new economic tack, mean that the neo-Drachma will rapidly start collapsing in value relative to the Euro. Anyone holding Euro funds will hoard them or, even better, get them out of Greece as their relative value to the neo-Drachma soars.

So Greece enters into a period of hyperinflation. Public sector workers start striking in protest at being paid in increasingly worthless monopoly money and social welfare recipients fall ever further into poverty. The public sector generally starts to fall apart. Anyone with access to money outside Greece may well find that they are doing very well now, as their hard currency goes a long way, but for a lot of Greeks this period is nightmarish. Maybe further along, the devaluation of the neo-Drachma is good for Greek exporters, as their products are so much cheaper on the international market, but what exports does Greece potentially have? Maybe it will see a flood of tourists coming to spend their money in a country that is now amazingly cheap, but do people holiday in a country that is disintegrating?

Well, that's the best I can do. What do you think will happen?

From Hunting Monsters