The Fate Of Greece Now Depends Upon Millions…

June 26, 2015 0 Comments

Earlier this month, the Syriza administration discovered that Greece didn’t have all €300 million to repay the IMF on June 5th. Instead, the government decided to reconsolidate their arrangement with the IMF, lumping all of their June repayments into one payment bundle of €1.5 billion, due by this Tuesday.

Three weeks later, and Greece is unfortunately no closer to being able to repay the IMF than it was earlier this month. Greece is trying to persuade Europe to lend cash to avoid defaulting on the debt to the IMF.

Within those three weeks, there have been three negotiations Greece has had with EU creditors. At the heart of the negotiations: reforms-for-cash, to which Prime Minister Alex Tsipras has proposed the one tactic in the revenue raising arsenal: Tax Hikes. Tsipras is planning on sticking it to the big corporations by levying a one time 12% corporate profit tax over €500,000. Of course, the creditors don’t believe this idea is feasible, but they are behind raising the luxury tax on yachts from 10% to 13%, and increasing the marginal corporate tax rate from 26% to 28%.

In terms of other taxes, Athens wanted the VAT of basic food items at the middle tier rate, while all other types of food (such as food at the restaurant) would be set at 23% VAT. They also can enjoy the super reduced rate of 6% VAT on goods such as pharmaceuticals and the theatre (my personal favorite).

Of course, most people understand that solving a debt problem is based more than just tax pledges. IMF Director, Christine Lagarde understands this as well, which is why creditors have taken the liberty of drafting their own reforms,

Pensions are one of the biggest problems plaguing the Greek economy, and it is in dire need of reform. It’s also one of the largest sacred cows of the Syriza party; however, if they want this money to remain solvent, Greece needed to agree to the following proposals.

  • Moving the retirement age to 67 by 2022. Originally, Athens wanted that statuary limit to be moved by 2035.
  • Eliminating the provision known as the ‘solidarity grant,’ also known as the Pensioners’ Social Solidarity Benefit (EKAS), by 2019, which also poorer pensioners to be paid top-up bonuses.
  • A phase out of the EKAS effective immediately.
  • Increased the amount pensioners’ must make towards health care contributions from 4% to 6%.

There are many other reforms Greece needed to make, the pensions being considered the largest of them all (A completely list of it here). These proposals came with a €15.5 billion string attached: €3.3 billion from the Securities Market Program (SMP), €3.5 from the IMF and €8.7 billion from the European Financial Stability Facility (EFSF).

As explained before, the EFSF is at the complete disposal of the Eurogroup, which means any of the funds from the EFSF can only be used for the purpose of recapitalizing the banking sector. The SMP is a different tool, used by the European Central Bank, which is used for the purposes of buying sovereign debt on the secondary market. The goal of the SMP is to counteract disruptions in the monetary atmosphere.

This is considered a big deal because the ECB keeps all profits it makes from the SMP. However, the ECB is willing to provide those profits to Greece (in return of drastic reforms), thus forfeiting the money it makes on Greece sovereign debt (or any other debt). Not only would Greece would be able to repay the ECB with its own money, the disbursement of these funds would be relatively short, as opposed to the EFSF.

German Chancellor Angela Merkel advised Tsipras to accept what she would call a ‘generous offer.’ So, what happen next? He didn’t accept it.

Speaking at the end of an EU summit in Brussels, Ms Merkel said that she and French president François Hollande had “asked and urged” the Greek leader face-to-face to “take the remaining step” to reach agreement with the bailout monitors.

But Mr Tsipras rejected the creditors’ offer, saying Greece would not be threatened with “blackmail and ultimatums”. He flew back to Athens on Friday evening to consult his cabinet and ruling Syriza party.

So now, Tspras is going to let the people decide whether or not the government should accept the creditor’s proposal in a snap election called, a referendum.

Greek Prime Minister Alexis Tsipras called a surprise referendum for July 5 on the tough economic policies the country’s creditors want in exchange for more rescue funding, escalating the drama surrounding the country’s long-running bailout and deepening doubt over Greece’s fate in the eurozone.

Addressing the nation at 1 a.m. in Athens, Mr. Tsipras told a television audience that Greek voters should have their say on the economic retrenchment that other eurozone countries and the International Monetary Fund are demanding of Greece. He said he couldn’t accept the list of policies that creditors presented in Brussels this week, which include some drastic tax hikes and sharp cuts to government spending, including on pensions.

Most European policy makers were taken by surprise by the Greek premier’s announcement, though Mr. Tsipras said he had informed German Chancellor Angela Merkel and French President François Hollande about his decision.

And things have not exactly gotten that bad, but the citizens of the nation aren’t taking any chances right now.

People are lining up to get whatever cash they could get out of the ATM, as they have no idea what the government might do with their money. People are wondering if there is going to be a repeat of the Cyprus economy.

What’s Going To Happen?

Very few options the Greek people have at their disposal. For one, there is a possibility that the people of Greece could come to terms with reality and accept the bailout, along with the terms attached with it. This would mean more austerity in the form of cuts to pensions and wages.

Or, he could play a big game of chicken and see if the IMF and the Eurozone will give in first. After all, they need Greece just as much as Greece needs them. However, German’s Finance Minster Schaeuble is the one who outright dismissed the Greek proposal, siding with Lagarde, that the plan was nothing more than tax hikes.

The only place this leaves Greece is an outright default, which is something the country is probably use to by now. Defaulting would effectively mean the ECB would end the Emergency Liquidity Assistance on Greek commercial banks, leaving banks without cash to facilitate necessary transactions. This would ultimately lead to capital controls in the region, which is why consumers are taking out whatever cash they can at 2 am in the morning.

Without enough liquidity for the banking sector and money to keep the country operating, the only option left would be for Greece to leave the Eurozone and start printing their own currency. From there, they wouldn’t have to worry about the ECB, IMF or any more creditors.

Maybe Greece would be better off leaving the EU. Then again, maybe they won’t. It’s not like the nation has a historical track record of preserving the value of the Drachma, or making good on their financial obligations. Regardless of the path they choose, it’s going to be difficult avoiding the upcoming financial meltdown occurring in Greece soon.

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