Thursday, 9 July 2015

After the referendum, a financial storm brews in Greece

This article was published by Al Jazeera International. 

“Will you vote Yes or No to austerity?” I asked the kiosk owner.

He held up his two middle fingers. “Either way,” he replied, “the result will be the same.”

That gesture broadly summarised Greeks’ view of their future as they headed into a referendum last Sunday that delivered a resounding No vote to further austerity.

Although four out of five Greeks were polled as wanting to stay in the Eurozone days ahead of the referendum, three out of five voted against the austerity measures that would ensure that; and one in two didn’t even believe a No vote would make any difference.

“It was a very smart move by whoever wanted to corner [German Chancellor Angela] Merkel,” says George Kintis, who heads up a private equity firm called Alcimos.

The ruling leftwing Syriza party, which called the referendum, hailed it as a victory. “We proved that even in the direst of times, democracy cannot be held to ransom, but remains a supreme value and means of resolution,” said Prime Minister Alexis Tsipras.

But has the No vote helped shape a better deal for Greece?  

Contrary to the defiance expressed by the people, the Greek government’s actions suggest that it is now scrambling to secure a deal by Sunday – a deadline European leaders have referred to as “final”.

Greece’s new finance minister, Euclid Tsakalotos, promises “to immediately implement a set of measures as early as the beginning of next week.” Those include tax reforms and pension reform, alluding to $1.5bn of consumer tax increases and pension spending cuts, which formed the core of the plan Greek voters rejected.

In a letter to his principal creditors, the European Commission, the European Central Bank and the International Monetary Fund, Prime Minister Alexis Tsipras had capitulated to most of the provisions in the plan five days before the referendum.  

On Thursday, Greek media leaked a new Greek proposal containing up to 12bn euros in austerity measures – more than any proposal so far this year. According to the leaks, the government has surrendered to a 23 percent VAT tax for restaurants, transport and most food products and agreed to end early retirement immediately. These were all concessions Syriza fought against hard.

Bank closure suffocates the economy

What makes a deal urgent for Greece is the closure of banks. Greek banks on Thursday said their doors would remain closed and capital controls in place until 13 July - fully a two-week period since they began.

That closure is slowly killing the economy. “Food and medicine imports are now being rationed,” says Konstantinos Mihalos, president of the Athens Chamber of Commerce, who owns a meat importing business. “There is no set level; it’s on a case-by-case basis. But the biggest problem is in the supply of meat and flour.”

The banking association had previously said its banks would run out of money last Monday. “The extra liquidity came from a few hundred million in Emergency Liquidity Assistance money we had asked the banking system to hold in reserve when capital controls were first announced,” says Mihalos. “But even that won’t last forever. At some point, some ATMs will begin to run out.”

Some multinational drugmakers have begun to reduce their supply of medicines to Greece since capital controls came into force, says the Hellenic Association of Medicine Wholesalers, despite the fact that wholesalers pay cash up front for their orders.

“Drugmakers are in some cases substantially reducing our orders to them,” says Eirini Markaki, president of the Association. “And three companies in particular are doing this to a dramatic degree.”

A letter from the Association, seen by Al Jazeera, says that “Astra-Zeneca, Janssen-Cilag and Novartis, imparticular, are contravening Greek and European law by horizontally reducing the quantities of medicines they are delivering to Greek wholesalers.” The result, it says, is a “disruption in the smooth supply of the market” and “the creation of dysfunctions”.  

Internal trade is also suffering as capital controls kill consumption. “If liquidity flow is not restored urgently, then the explosion of unemployment will be dramatic,” warns Vasilis Korkidis, president of the Hellenic Federation of Commerce & Entrepreneurship.

Capital controls are hardest on businesses and institutions. For charities like Hamogelo, which runs foster homes for 365 abandoned children, it is potentially ruinous.

“We have food until the end of August,” says Hamogelo’s public relations officer, Panayotis Pardalis. “Our big problem is liquidity. We’re trying to open up overseas bank accounts in countries where there are large Greek communities, and to mobilise them to help us. Right now, it’s a question of survival.”

The bank closure has not only prevented Hamogelo from drawing on its accounts. It has also frozen donations. Hamogelo cannot make the July payroll for some 400 employees, including the psychologists, social workers and special needs teachers who run its homes.

“It’s as though someone is holding our head under water,” says founder Kostas Yiannopoulos. “What can we cut? The kids we’re funding through college? The foster homes where we’re raising kids?”

Hamogelo also runs national help lines for distressed families, an ambulance service and an outreach programme that provides food and medicine to thousands of families.

Capital controls began on June 28, after the European Central Bank announced that it would freeze further disbursements of Emergency Liquidity Assistance to Greek banks. This has been their only source of cash since 2012.

Kintis, a former banker, believes the ECB acted “beyond the powers conferred upon it” for political reasons – to put pressure on the Greek government to comply with a new austerity package. His private equity firm, Alcimos, filed a lawsuit against the ECB in the European Court.

The ECB can refuse a request for ELA if the institution it is insolvent, says Kintis. “Greek banks cannot be both solvent and insolvent at the same time,” he says.

The broader problem, says Kintis, is an economic worldview that prevents Germany from allowing the Greeks longer to repay their debt – which would amount to a haircut, because inflation would consume much of the debt’s value.

“For Germans, loose monetary or fiscal policy results in recession… The tug of war is between the US and Germany. The US and International Monetary Fund are pushing for a haircut [of Greek debt], which is a fiscal transfer from the north to the south.”

Six months ago, the conservative government fell from power after it was revealed that then-finance minister Gikas Hardouvelis was discussing additional austerity measures worth a billion euros. With the economy in recession, a stricken banking system, no deal on debt restructuring and a 12bn euro austerity package, Syriza will be hard pressed to claim a victory on Sunday. 

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