Greek tragedy
Some volatility is inevitable. But the fallout from the crisis seems containable.
Talks between Greece and its three creditors, the European Central Bank, the International Monetary Fund and the 18 other eurozone countries, on the terms for extending Greece’s bailout programme beyond June 30, broke down over the weekend. On Saturday, Greek Prime Minister Alexis Tsipras announced a referendum, scheduled for July 5, on the troika’s terms — changes in pension and taxation structures, etc — but the country’s creditors have refused to extend the bailout till then. However, Greece, which cannot access capital markets and has been relying on money from the troika to pay its debts and bills, needs to repay the IMF 1.6 billion euros on Tuesday, or fall into default. Now, with a run on the country’s banks gaining momentum and the ECB capping the emergency funds available to them, the government has decreed that all banks down their shutters and ATM withdrawals be capped at 60 euros per day. Eventually, if Greece has to print its own money to pay salaries and pensions, it would have to leave the monetary union. But Greece doesn’t seem to be a Lehman, and the threat of contagion to the eurozone and the world seems limited.
For one, most Greek debt — about 80 per cent — is owed to “official” lenders; it isn’t held by the public or financial firms at large. Further, it’s vanilla debt, not an alphabet soup of collateralised derivatives that had, in 2008, seeped into practically every corner of the global financial system. Back then, no one knew who was holding how much toxic debt, but this time, the chances of a domino effect getting set off by a Greek collapse are few. The eurozone, too, is better armoured to deal with a crisis — its banks are better capitalised and a large bailout fund has been established. Even though the 10-year government bond yields of Portugal, Spain and Italy, for instance, spiked sharply on Monday — volatility is inevitable — Germany, the eurozone’s heavy lifter, has indicated that it will “do everything to prevent every possible threat of contagion”.
There are lessons to be learnt for India: Be cautious on foreign debt, which can reverse quickly. In 2013, when there was a near run on the rupee, it was because foreign portfolio investors had dumped government debt and moved on to greener pastures. The Greece story calls for caution on external commercial borrowings and short-term portfolio debt. It underlines that it pays to be prudent.
