There can be little doubt that, had it not been for the severe austerity that the troika imposed on Greece—including the bailout for Greece’s creditors in 2010—the country would have weathered its crisis much better. But as a Greek leader of standing, prime minister Alexis Tsipras should be aware of the legend of Icarus and what happened when, as a result of soaring ambition, he flew too close to the sun. Tsipras thought, and probably still thinks, that the Europeans need Greece to be in for the euro to survive. All of this is true, and a Grexit will impose heavy costs on Europe as the European Central Bank (ECB) will have to buy bonds in very large quantities as it struggles to keep interest rates down as the aftershocks of a Grexit get passed on to other weak economies. But Tsipras needs to think, above all, of the people who elected him, and where he has led them. Not repaying the IMF, or the European Central Bank, may serve as solace to injured Greek pride, but it is important to look at the consequences of this, though it has to be said we are in completely uncharted waters here.
The collateral of Greek banks today is debt issued or guaranteed by the Greek government—with this rated as junk, it is not worth the paper it is printed upon. So, the only thing that has kept Greek banks going is the Emergency Liquidity Assistance by the ECB. With Tsipras playing hardball, it is only a matter of time before this is withdrawn. Once that happens, the Greek banks will be officially bankrupt—even the limits of withdrawing 60 euro per day will then have to be stopped. As Hugo Dixon points out in his Reuters BreakingViews column, the only way to recapitalise Greek banks is to confiscate a part of people’s deposits and convert them into bank shares—that is what Cyprus did two years ago, but much of the Cypriot tax applied to rich Russian oligarchs whom no one shed a tear for.
The more immediate crisis will be to bring an alternative currency to replace the Euro, and while the Greek government may have some back up plans, introducing a new currency is not something done in an emergency situation. Even if this does happen smoothly, the value of the currency will be dramatically weaker than the euro, so a very large bout of runaway inflation is almost immediately a certainty. With a weak currency, and weaker government coffers, import credit will be a casualty, so a shortage of imports of fuel, for instance, has to be immediately factored in. The impact on Greek firms who have borrowed in euros is also unclear … In other words, it is not clear whether those voting ‘no’ in this week’s referendum know what they are voting for. In the ensuing chaos, Tsipras himself could be a casualty and there is no telling what kind of coalition a fresh election will throw up. In the longer run, the rest of the Eurozone will also have to deal with the ramifications of Grexit, but its immediate brunt will have to be borne by the average Greek, and it is by no means certain this will be less painful than the troika’s austerity package.