Greek Crisis: Banks and Stock Market Closed for a Week

With European Central Bank (ECB) capping the Emergency Liquidity Assistance (ELA) to Greek banks, the Greek government had no other option but to impose capital controls on Greece's financial system. Without the emergency assistance, the Greek banks may not have the liquidity to address large withdrawals that can now take place. Prime Minister Tsipras, in a press conference, announced a Bank holiday till July 6th, and setting up of a committee to approve all payments abroad. The capital controls apply not only to Greek banks but to local branches of all foreign banks as well. The Greek stock market has also been closed for the time being.

The sudden spiralling of the Greek crisis took place when the Greek government and the troika – the European Commission, the IMF, the ECB – could not come to an agreement on the way Greece should move forward on its debts. With a 25% contraction of its economy and unemployment levels as high as 50-60% for the Greek youth, a continuation with the “punitive austerity” policies prescribed by the troika were politically infeasible for the Syriza government. Krugman writes, “The troika clearly did a reverse Corleone — they made Tsipras an offer he can’t accept, and presumably did this knowingly. So the ultimatum was, in effect, a move to replace the Greek government.”

The Syriza decision not to submit further to the troika “blackmail” and going in for a referendum precipitated the immediate crisis. It also means that Greece will default on its repayment of 1.6 billion euro to IMF, which was due on 30th June, though IMF could relax this deadline by 30 days.

Image Courtesy: pixabay.com

If the Greek people reject the troika proposals, a very likely outcome of the referendum, a Greek exit (Grexit) from the 19 country monetary union (eurozone) is inevitable. Already, the course set by both sides point to a very likely Grexit, sooner rather than later. It is no longer a collision course between the troika and the Greek government.

Clearly, the troika have factored this in, when they made demands they knew that Syriza could not accept. The eurozone leaders believe that they have now sufficiently ring-fenced the eurozone economy and the euro from a Greek contagion and are willing to risk a Grexit.

Early figures seem to show otherwise. Both the euro and the European stocks are being hammered. Predictions by Goldman Sachs is that the Euro will lose up to 10% of its value following the Grexit.

The global economy may also be hit, though the Greek GDP is a tiny fraction of even the EU economy (1.2%). Already, Asian stock markets have also nosedived, fearing the stability of the entire Eurozone.

There are many critics of the Syriza strategy. Some have argued that their announcements that a Grexit was not on the cards, was negotiating with both hands tied behind their backs. Having done that, seeking a last minute referendum, means a disorderly exit from the euro with more pain than a planned exit.

Greece has had more than 5 years of a strategy which is manifestly not working. For the troika, this was a high-stake game of not conceding a failure of austerity as the only policy irrespective of the nature of the economic crisis. Even Procrustes of Greek mythology had at least two strategies; he made his guests “fit” the bed by either chopping off their feet or stretching them. Paul Krugman, Stiglitz, Piketty and a host of other economists have talked about the voodoo economics that the current financial powers are practicing.

The European governments are today all run by political parties that have declared their unshaken belief in Aesop's fables of the spendthrift honeybee and the industrious ant. In their scheme of things, austerity is the bitter medicine to treat the indolent Greeks and other “southern” Europeans. For them the rise of Syriza in Greece, Podemos in Spain and any other formation that draw their strength from questioning the austerity dogma, cannot be allowed to pass. That is why the need to punish Greece, even if such a step poses a threat to the eurozone. Letting Greece get easier terms would then de-legitimise all those parties that have signed on the dotted line of austerity. Not surprisingly, even the social democratic parties, have all joined with the more avowedly right wing formations in Europe in a “united front” not to allow any wiggle room for Greece.

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