The single biggest issue with a Greek government default will be the effect it has on the banks in Greece.
You have to assume that if the Greek government were to default, the banks, at least the largest banks, would close their doors.
Given this has been known as a possibility since the Greek government entered the current crisis, what plans could have been put in place to protect savers?
To take a step back first of all, there is only one obvious reason as to why the Greek government has been granted the bailouts it has until now and that is to buy the government time to sort out its finances instead of defaulting.
But why does the Troika want to give the Greek government time to avert a default?
- To protect the Euro?
- To protect the Greek people?
- To protect international investors and banks?
- To protect European governments?
Let me take these points one by one.
To protect the Euro. It is hard to see how a Greek default would have any meaningful effect on the Euro as a currency. Greece is a small percentage of the Euro GDP but it is a complex subject, here is an article that tries to explain the effects have on a currency. I will assume that a Greek default would have a negligible effect on the Euro.
To protect the Greek people. Ultimately a country is its people. Does the bailout help the country or the people of Greece? Debatable.
The conditions attached to the government bailout loans would be much more easily achieved if the Greek government were to default.
The bailout money could then be given directly to Greece’s banks depositors instead of being used to fund the servicing of the country’s massive debt.
To protect international banks/investors. This is connected to the next point but looking at it in isolation. There is no doubt that international investors would get burned if the Greek government were to suspend loan payments.
Be that as it may, we are supposed to live in a capitalist society. European governments stepping in to protect international investors would be socialising the losses of these investors whereas if the bets of the investors had worked out, the taxpayers who are bailing out the Greek government would not see a penny.
In short it certainly looks like the bailouts are designed to bail out investors in Greek debt but you have to ask the question, why is that acceptable?
To protect European governments. It is possible that a Greek default could shake investor confidence in the economies of other Euro nations. But this is only possible if the fundamentals of the countries concerned are weak.
For example it is hard to imagine investor confidence being dented in Germany if Greece were to default. The same could not be said for Spain or Portugal.
The argument could also be made that Euro countries which did default under the Euro would be extremely attractive investments if they were to shed their old government debt. Which arguably would be a huge shot in the arm for the Euro zone.
So looking at these 4 motives in a very basic way, the apparent prime reason for the Greek government bailout is to protect international investors.
Given that the Greek government also has an extremely laid back attitude when it comes to sorting out its finances the motive for the bailout being to buy the Greek government time does not hold water. At least in my opinion.
With regards to protecting the Euro and European governments, there are potential short-term downsides to both should a Greek default occur, but arguably, it would put the Euro currency and the Euro zone on a much more solid footing in the long term if the worst were to happen.
So given that protecting international investors appears to be the most likely motive for the Greek government bailouts, it asks the question, is this morally acceptable?
Is it morally acceptable that taxpayers in the Euro zone and especially taxpayers in Greece, are being asked to cover the losses of private investors when these same taxpayers would not benefit in any profits?
The obvious answer is no, so why are European government getting involved? Again, an obvious answer is that the same international investors are threatening them with options 1 & 4.
So going back to the original question, what will happen to the deposits in Greek banks should the government default and the Greek banks were to close, the worst case scenario.
Given that European countries have been prepared to commit themselves to bail out private investors, am I reaching when I believe these same governments would not insure the deposits of Greeks?
I personally believe that Germany at least will step forward. Sure there will be conditions attached but it is highly unlikely that the conditions Germany would ask for after a default would be as harsh as the conditions before a default.
Simply because they would not need to ask for so much. The biggest problem in the whole Greek crisis would be massively reduced ie the Greek government bureaucracy.
A German bailout of Greek depositors would bypass the Greek government bureaucracy, arguable making this bailout much better value for Germans and much better value for Greeks.
Ultimately, the entire Greek financial crisis is down to the Greek size of government and it’s hug involvement in the private economy.
What has escalated the greek crisis to the size we see today is the Greek government efforts to pass on its problems to the Greek private sector.
Not only has this taken the Greek government to the verge of default it has also meant the billions of Euros pumped into Greece up until now through Troika bailouts has been squandered.
And besides, even if European governments did not refinance Greek depositors, it is hard to imagine a new wave of foreign banks and investors wanting to refinance the Greek economy given that it will be starting from a clean sheet.
But Greece being attractive to foreign banks and investors, and other European government come to that, comes down to the Greek government doing the right thing in the post default environment and that is staying well and truly out of the economy.
And that means minimal taxation and minimal regulations, unfortunately, the exact opposite of what the Greek government has been doing for the duration of it’s crisis until now, and some would argue since the fall of the junta.
Greece has so much potential to make a fresh start but going on recent form, the current political class in Greece has got the ability to completely screw it up through their interference and besides, are Greeks ready to experience true freedom or will they let yet more political promises deceive them?
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