10 things you should know about the crisis in Greece
Here is what you need to know now as Greece enters a pivotal week in its testy relationship with the Eurozone:
1. Greece’s most immediate as in first thing Monday morning source of danger is its banking system. To compensate for accelerated deposit flight, the European Central Bank injected additional emergency funding on Friday to allow the banks to open on Monday. With a lot more needed, the ECB will grow more hesitant to pump in new money unless the Greek government secures an agreement with its European partners and the institutions through which they operate (the European Commission, the ECB and the International Monetary Fund).
2. A Summit of European leaders has been called for Monday to increase the chances of such an agreement. The aim is to find a compromise under which Greece would agree to a set of economic reforms, creditors would provide additional debt relief, and at least 7 billion euros of previously committed funds would be released immediately to help Greece navigate its tough payments schedule over the next few weeks.
3. The Greek government faces a virtually impossible choice in these negotiations. Either it relents and agrees to the demands of its increasingly restless creditors, thereby breaking its electoral promises and undermining what it has fought and stood for; or it holds out and risks seeing a series of disruptions that include the total implosion of the banking system, the rapid accumulation of payments arrears to creditors and suppliers, the imposition of capital controls to counter the accelerated flight of money out of Greece, and the issuance of government IOUs to meet pensions and other government obligations all of which would deal another blow to an economy that is already ravaged by recession, alarming unemployment and climbing poverty; and it would render very difficult Greece’s continued membership of the Eurozone.
4. The unpleasant choices also apply to Greece’s creditors. Even if the Greek government agrees to additional reforms, few believe that it would actually implement them. As such, they fear that the new money disbursed would only buy the country a few weeks while continuing to transfer private liabilities to the European tax payers; and this is assuming that national parliaments, including in Greece, would approve the revised terms for the bailout. Yet the alternative is also very unappealing. If creditors continue to withhold funds, Greece would be tipped into a catastrophic crisis that, for the rest of Europe, would also entail the threat of massive migration out of the country as well as geo-political risks.
5. Markets have been relatively calm in the face of a growing probability of a Graccident and the Grexit that this could entail. Some market participants believe that, as has repeatedly been the case in the past, a last minute agreement will be reached to avert a Greek economic, financial, social and political disaster. Others realize that such an agreement could well elude Europe this time around but are comforted by the steps that have been taken to contain the negative spillovers.
6. The rest of the Eurozone is indeed better placed to deal with a Grexit than it has been at any time since this crisis first emerged in 2010. A number of regional funding windows have been put in place. The ECB has already embarked on large-scale balance sheet operations which could be rapidly expanded. The European Investment Bank has obtained greater lending flexibility. And the usual list of peripheral European countries at risk including Ireland, Italy, Portugal and Spain are themselves less vulnerable than in the past.
7. Minimizing contagion risk does not equate to eliminating it. Given the truly unprecedented nature of all this, there are lots of unanswered questions, including vexing legal and operational ones. For example, it is far from clear how a Greek currency redenomination process would play out given that there are no established procedures for this. Existing safety nets are way too weak and already-extremely stretched to handle the likely human dislocations. And new mechanisms would need to be found to reset the banking system in order to restore a minimum level of financial services to citizens and companies.
8. While seeking an agreement to avert a Greek implosion, also expect European leaders to work hard on a “Plan B” that most, if not all, could rally around. In addition to establishing a new European relationship for Greece should it be forced to exit the single European currency system (such as an association agreement with the European Union), they would need to approve a “whatever it takes” mandate for regional institutions to contain contagion risk emanating from a Greek disaster.
9. The implications for the global economy depend in large part on whether European leaders succeed in finding a durable solution for Greece or, alternatively if they fail to do so, are able to contain the crisis from pushing the rest of the continent into recession and financial instability.
10. Whatever happens, and while the blame game is likely to intensify, there are important lessons to be learned for all involved. If this learning process does indeed happen over time, some small good could emerge of what otherwise is a terrible Greek tragedy.
This post originally appeared on Business Insider.
Mohamed El-Erian is chief economic adviser to Allianz and chair of President Obama’s Global Development Council.