A little more than a week after talks between Greece and its creditors broke down after Greek Prime Minister Alexis Tsipras announced he would put the creditors’ terms for the release of the last tranche of a bailout programme to a popular vote, the results of the referendum are in. And the noes have it. A clear majority (61.3 per cent) voted “No” and rejected the troika’s conditions for the deal that had since expired. The Greek drama has now entered the territory of “unknown unknowns”. On Tuesday, eurozone leaders are expected to attend an emergency summit on Greece. And while some see the No vote as a bargaining chip for Tsipras, others view it as the last straw for negotiation-weary eurozone politicians and citizens. In fact, the unexpected resignation of Greece’s outspoken Finance Minister Yanis Varoufakis on Monday is being seen as a kind of peace-offering to keep talks going. But what is clear is this: Unless Greece secures emergency liquidity assistance from the ECB to keep its four systemically important banks solvent, its banking system will run out of cash within the week, increasing the chances of a Grexit.
Greece has relied on bailout funds to pay its bills and debt for years now. Having defaulted on a 1.6 billion euro payment to the IMF on June 30, the Greek government is scheduled to make payments totalling 12.8 billion euro to the IMF, ECB and holders of Greek treasury bills between July and August. Greece needs a third bailout programme worth between 30 and 50 billion euro, which makes the 7.2 billion euro fund release that led to the referendum wrangle look like chicken feed. Further defaults would only hasten a Grexit. But at 180 per cent of the GDP, Greek debt already seems too high not to explore restructuring. Among other things, the Greek crisis is about unequal countries entering a monetary union that de facto takes away the ability to effect a depreciation to improve economic prospects. But an exit from the monetary union, which doesn’t necessarily mean an exit from the European Union, wouldn’t be breezy either — how would Greece, which has no major natural resources, get funding for its businesses, for example?
From an Indian perspective, there are some major lessons from the Greek crisis, and opportunities too. While Greece isn’t a Lehman, India’s macroeconomic foundations (current account and fiscal deficits) look good, and the RBI’s forex reserves seem adequate, it needs to be prudent on foreign debt, particularly unhedged foreign borrowings. Greece underscores the need to keep banks healthy. The crisis also presents an opportunity for India: with Europe in turmoil, equity capital will start looking for safer havens and relatively higher returns soon. That’s where India shouldn’t lose out. But for that, it’s critical to move fast on the policy front, show good intent — including on the GST and beefing up banks — and demonstrate stability.