When Greece’s governing and also radical leftist party, Syriza, won the Greek elections on January 25, 2015, it formed a coalition with the 13-seat nationalist Anel Party the next day after falling two seats short of the 151 seats needed to form the government on its own. But ever since the formation of the government, the world has been watching the developments as it has been in negotiations with the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) —better known as the Troika.
The Troika has been in charge of “managing” the ongoing Eurozone Debt Crisis that started in Greece in May 2010 and represents the international creditors of Greece.
Despite this, Syriza was in retreat in almost every step of the negotiations. It eventually became an “unreliable negotiating partner” in the eyes of its negotiating counterparts who finally made a ‘take it or leave it’ offer on June 25, 2015. And the unexpected happened the next day: the Syriza leader and Greek Prime Minister, Alexis Tsipras, called for a referendum to be held on July 5, 2015 to accept or reject this offer.
Back to 2001
About 64 per cent of eligible Greek voters participated in the referendum. In the end, of the votes that were valid, 61 per cent were ‘no’ and 39 per cent were yes.
The problem with the referendum was that not only had the Troika’s offer already expired, but also consisted of two lengthy documents that were incomprehensible to most voters. Indeed, on this expiry date, Greece became the first developed country to default on the IMF as it failed to transfer €1.55 billion by the end of the business day — the single largest missed repayment in the IMF’s history.
So, what did the voters reject? To answer this, let us go back to 2001.
For a country of the European Union to enter the eurozone, that country must meet the criterion of the 1992 Maastricht Treaty on debt levels and deficit spending. Despite meeting this with difficulty, through Wall Street, particularly, with Goldman Sachs-assisted “creative” accounting and financial engineering, Greece entered the eurozone in January 2001. From 2001 to 2007, the Greek Gross Domestic Product (GDP) grew at an impressive average rate of 4.3 per cent, compared with the eurozone average of 3.1 per cent. Incidentally, this period intersected with the 2002-2007 monetary expansion in the advanced capitalist countries of the centre. In search of high yields, private capital started to flow from the centre to the periphery, creating excessively easy credit conditions. Indeed, the primary drivers of these impressive growth rates were this easy, credit-fuelled, private consumption and government spending. Unfortunately, a significant portion of the credit-fueled government spending was for non-productive purposes such as the 2004 Athens Olympics and military needs, notably on German ships and tanks, which was about 3 per cent of the GDP in the period — the highest in Europe.
Then came the Great Recession in the United States, which lasted from January 2007 to June 2009. Further, in June 2007, the ongoing Global Financial Crisis hit the U.S. When Lehman collapsed in September 2008, both the financial crisis and Great Recession became global. Under these conditions, the private capital flow surge that started in 2002 from the centre to the periphery suddenly reversed in 2008. Both these events adversely affected not only the Greek economy, but also its ability to roll over its debts. Unlike non-eurozone peripheral countries with their own domestic currencies, Greece was unable to devalue its currency and raise the interest rates to weather the storm. Soon, Greece found itself in trouble.
Although Greece had managed to get away with dressing its balance sheet for years, the cosmetic treatment of the balance sheet became evident in early 2009. When the Papandreou government that was elected in October 2009 stopped the exercise and released the true numbers, it became evident that Greece was not suffering from illiquidity. It was insolvent.
Click here to read the complete article at The Hindu.
(T. Sabri Öncü is a co-founder of SoS Economics in Istanbul. He has worked inter alia as Senior Economist for UNCTAD and as Head of Research at the Reserve Bank of India’s Centre for Advanced Financial Research and Learning.)