A Modern Day Greek Tragedy
Remember those Greek tragedies we all had to read in High School? The basic plot lines always had the protagonist with a fatal personality flaw, which he didn’t recognize until he met his end. Over the weekend we moved closer to a real-life Greek financial tragedy and this one may impact the United States economy.
About the only thing that the German and Greek economies have in common is that they share a common currency: the Euro. For the past five years, the Greek financial system has been kept alive by loans from a consortium of international creditors. These loans have come at a steep price. Led by Germany, creditors have demanded structural reforms in Greek government spending. Although these reforms were starting to demonstrate some benefits, with the Greek unemployment rate over 25%, late last year, Greeks voted to hand over power to a party opposed to further Greek concessions in return for financial aid.
On the one hand, the Greeks bet that the Germans would agree to modify the demanded reforms rather than let the Greeks default on the debt payment and walk away from the Euro. On the other hand, the Germans knew that the Greeks overwhelmingly support membership in the Euro Zone and assumed that the Greeks would ultimately agree to continue structural reforms to maintain their financial system. This game of international chicken took a dramatic turn for the worse over the weekend.
With Greek debt payments due tomorrow, European creditors rejected Greece’s latest offer to restructure its debt. To everyone’s surprise, Greece’s Prime Minister, Alexis Tsipras, called for a referendum to decide whether or not to agree to European demands. Considering that this referendum is scheduled for July 5, this move is strange enough. But what really has Europe digging in its heels this morning is the fact that Greece’s Prime Minister is actually urging its citizens to vote against European demands. He apparently believes that a public rejection by his countrymen will give Germany no choice but to agree to better terms.
Early signs are that this gambit is going to backfire. To prevent a further run on Greek banks, limits have been placed on the amount of money that can be withdrawn from bank accounts and according to press reports, now the European public and its politicians are unified in their opposition to Greek demands. If Greece votes no on the referendum, it will have no choice but to do away with the Euro and start printing its own currency once again.
All very interesting, Henry, but why should I care? Importantly, this will have an impact on the U.S,. Economy, the only question is how great the impact will be. Already this morning, the yield on 10-year U.S. Treasuries is down and the stock market appears poised for an early tumble. In a worse case scenario, Greece exists the Euro and the debt of other European countries such as Italy and Portugal skyrockets as investors question Europe’s commitment to supporting the Euro. This body blow to the European economy would weaken economic growth for the United States and for China as well. In a best case scenario, five years of this Greek tragedy has given private creditors more than enough time to unwind their exposure from a so-called Grexit. Europe suffers a temporary setback but is ultimately strengthened as Greece no longer hangs like an Anvil over Europe. Either way, it’s safe to say that the single most important economic event over the summer will not occur in the United States. Hopefully, calmer heads will prevail between now and tomorrow.