By 416 B.C., the Peloponnesian War already was a decade and a half in progress. The city-state of Athens and the Spartan's Peloponnesian League were locked in an endurance struggle for regional dominance. The base of Athenian power was its navy and a request for aid was received from two Athenian allies in Sicily. The great general and orator Pericles has long died as the assembly convenes the issue before them. Alcibiades, a man who would sell his loyalties in this conflict more than once, uses his serpent-like sophistry to debate the sensible but outmatched General Nicias. The catastrophic Sicilian expedition cost much treasure and decimated the Athenian navy. It marked the end of Athenian dominance; an era that gave us Socrates and Plato, the architects and sculptors of the Parthenon, Hippocrates, and medical inquiry, and the inventor of historiography, Herodotus.
Wind the stars ahead just a bit under two and a half millennia and come now another false prophet. Were this nation a river, its course will be inexorably altered and its flow may soon but slow to a trickle. The election of a radical leftist on campaign promises to force repudiation of outstanding public loans speaks volumes on the ethos of the Greek population. Newly installed Prime Minister Alex Tsipras also vowed a rebellion against EU-mandated austerity and to magically raise wages. Beneath the gossamer web of bravado, this once great nation, this source from which sprung Western-style governance, is reduced to groveling.
On April 9 Greece scrounged together a 460 million euro payment due to the IMF (International Monetary Fund). Collective uncertainty whether funds were available underscores the parlous state of Greek finances. May 12 looms the next big test. On that day, Prime Minister Tsipras, and flamboyant finance minister Yanis Varoufakis, will have to pull out (again for the IMF) a 767 million euro (around $840 million) rabbit from the treasury hat. Without bailout money the money just "ain't" there.
What Will Happen?
There will be the drama of a Sophocles tragedy but in the end frustrated Eurozone finance ministers currently meeting in Riga, Latvia will reluctantly approve, or at worst defer, the vapid Varoufakis basket of reforms. The first tranche of 1.2 billion euro will be released in time for the May 12th payment. Next, there are nearly $1.6 IMF payments due by June 19. Within more quibbling, cowardice will again prevail, and more heroin and needles will be distributed. The trouble comes on July 20 and August 20 when $8.0 billion euros are due to the ECB (European Central Bank). All in, Greece has close 20 billion euro payable in the next six months. Sometime during this period Germany and the Eurozone will have had enough. Pressure on the Merkel administration will demand Germany to stop making the next door neighbor's mortgage payments.
The Greek Reform Plan or Lack Thereof
About a month ago Mr. Varoufakis submitted to Greek creditors a theoretically detailed 26-page plan that spells out reforms intended to right this Titanic of an economy. Its supercilious tone is only exceeded by the amorphous nature of the proposals that it contains. In the introduction, the finance minister pontificates: "The larger purpose of this document is........to unlock short term financing that will permit the Greek government to meet immediate obligations..." Not so subtly implied is that reforms, fixing this tumor filled economy, is secondary to the addict getting resupplied with drugs. The short term financing to which he refers is a $7.2 billion bailout (distributed in phases) once the Troika (ECB, IMF, and European Commission) have blessed this so-called reform plan.
Like a schoolmaster, Mr. Varoufakis arrogantly continues his lessons: "The Hellenic Republic considers itself to be a proud indefeasible......and irrevocable member of the Eurozone. The viability of that Union, and especially the common currency, is now in question....." The only thing in question is whether Greece will remain a part of the Eurozone.
This so-called "reform package" as near as I can tell, mainly talks about doing a better job of curbing the Greek national pastime of tax evasion. There are plans to tackle the illegal trade in oil, tobacco, and alcohol. There are aspirations to combat VAT fraud. There is some lip service to making government more efficient and curbing pension growth. To the chagrin of creditors, this redistributionist government has increased pensions by 600 million euros for lower income workers. All politicians must pander to their base.
Empirically examined, the Hellenic Republic has little to recommend itself that its words will morph into actions or results. In the six years since the crisis began, GDP has withered 25 percent, unemployment remains around 24 percent and the recently released 2014-2015 World Economic Forum report spells out the both the bleakness and ineptness of this fallen society. Out of 142 total surveyed countries consider the following ranks:
Effect of Taxation on Incentives to Work 138 Soundness of Banks 141
Burden of Government Regulation 136 Macroeconomic Environment 135
Wastefulness of Government Spending 131 Government Debt to GDP % 142
Transparency of Govt. Policymaking 120 Ease of Access to Loans 136
Effect of Taxation on Incentives to Invest 141
These statistics trail most third world locales and reflect the abysmal state of the Greek economy. Aristides N. Hatzis, University of Athens professor of law and economics bluntly says, "Most Greeks today do not realize how wealth is created. They still believe that it is the result of government spending, loans, and subsidies and that it can be safeguarded by protectionism and regulation". Speaking of protectionism, Paul Thomsen of the IMF stationed in Greece ads, "where legal restrictions have been lifted (to open a new business), new administrative barriers often crop up". Business cartels often control politicians and the press to keep vested interests intact. This economic paralysis has decayed Greece into a rotted dilapidated society now devoid of creativity and entrepreneurship. It is an ethos that exhibits no moral conundrum about continuing to suckle the Eurozone breast and has even less of a quandary about ever repaying its debts. After all, the populist Tsipras was selected on his pledge to repudiate debts.
Mr. Tsipras had few listeners with his debt forgiveness babble. Was there such a distance between now and 2012? In May of that year, Greece was the largest sovereign debt default on record. With a few signatures, agreements were in place that erased 105 billion euros of debt owed to private creditors and reduced the interest rate and lengthened the repayment term for the balance. All in, lenders are said to have lost 75 percent of their investments and now somehow, with a straight face, Greece asks for even more bailout money. At 177 percent, Greece already has the highest debt to GPD ratio in the world. Billions in deposits continue to flee for safer havens leaving Greek banks struggling to remain solvent.
The Fallout from a "Grexit."
Not much. Some prognosticators predict tremendous volatility, contagion to financially challenged southern neighbors Italy and Spain, and ultimate collapse of the Eurozone. At a roughly 185 billion euros in GDP, reality suggests the Greek economy to be little more than a pimple on an elephants butt in terms of relative size to the $16 trillion Eurozone. The debts to private creditors were mostly dealt with in the 2012 restructuring, so these are now only around 10 percent of Greece's total outstanding 320 billion euro indebtedness. Also European and especially American banks, besides being much better capitalized, have most probably provisioned for potential Greek losses.
Fallout to Spain and Italy and Portugal, for the near term at least, will not happen. The low borrowing costs, conferred upon them by Eurozone membership are a powerful incentive for those countries to get their economic houses in working order. As stand-alone credits, these three countries would be rated at or near junk status, costing them many extra billions in debt service costs. ECB President Mario Draghi will cover the airwaves to guarantee all bank deposits, heading off any possible runs on their financial institutions.
Greece will reintroduce the Drachma, which, I predict, will initially devalue at least 30 or 40 percent versus the Euro. Unfortunately, Greece imports are nearly twice their exports ($60 billion to $33 billion). Import prices will rise dramatically, but cheaper exports and increased tourism will reduce this trade imbalance. Inflation could become rampant depending on whether the Greek people will change their habits.
Greece matters little in today's world. Last week yields on its three-year notes soared 1.83 percent to 28.58 percent. The ten-year bond yield rose slightly to 13.27 percent. This 15 percent yield curve "inversion" is one of the widest since the crisis and represent a powerful indicator traders are expecting Greece to default on its debt. Now a supplicant nation for six years, the financial life support systems will be removed. This once grand Hellenic Republic, with its newly devalued currency, gets relegated to a tourist destination....... albeit a beautiful one that tells a story of a once great culture, which sadly its very own citizens have long abandoned.