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Union Without Unity: the Collapse of Greece

Jun 07, 2012 Written by  Felix Imonti, Guest Contributor

6190351342 54ca234f58Greece is the cradle of democracy. However, if current trends continue, it is going to be the crypt of the Euro.

Greek police have cautioned people to not withdraw their savings from the banks to avoid theft. The warning has come a little late, because a quarter of bank deposits haved been transferred electronically to mostly German banks by the end of May. The flight of capital has required the Bank of Greece to add 18 billion Euros to the banks to restore liquidity. Through the little discussed Emergency Liquidity Assistance fund, 100 billion Euros have been borrowed by the central bank to keep the bank system solvent. The program is a type of intensive care for zombie banks. So far, four banks have gone through the ELA program, reliquified, and released.

The flight of capital is forcing the European Central Bank to keep putting money into Greece. In effect, the Greek savers have taken control away from the ECB. Only if the central bank stops replenishing the depleting funds can it regain its control, but that would bring down the Greek banks and set the Eurozone members onto a road to chaos.

Disaster seems to be so imminent that the brokerage house Newedge Group is no longer accepting buy orders for Greek equities. The Swiss are preparing controls on capital flows in expectation of the Euro collapse. The Bank of England has added 325 billion pounds to cover the anticipated economic strife, is preparing to cut interest rates to zero, and is advocating border controls to restrict the movement of panicking people.

A couple of years ago, not many thought that the collapse of the Euro was a possibility. Today, preparations for its demise are underway. What has brought the festering problem to a head was the inconclusive election on May 5th. The rise to importance of hither to unknown extremist parties brought the disorder of the streets into the halls of parliament. Suddenly, Alexis Tsipras, the thirty-seven year old head of the leftist Syriza party had taken the second largest number of seats in the Greek parliament and moved onto center stage. He is adopting a policy from the time of the “Cold War” when the United States and the Soviet Union contained each other through a “balance of terror” -- Mutual Assured Destruction.

The strategy is amazingly simple. Either the EU saves Greece or Greece will bring down the EU.

He holds Germany responsible as the main source of trouble. He told Der Spiegel, “…if our economic foundation is completely destroyed and the decisions of an elected Greek government are not responsible for it but, rather, certain political forces in Europe. Then they too will be guilty, for example Angela Merkel.”

If he is able to form a government after the June 17th election, he intends to discard the financial agreements of the previous administration. Alexis Tsipras is playing a game of chicken with the Eurozone and Angela Merkel. He has decided that in the end the others will back down and give him what he wants rather than to risk the economic dislocation that is certain to follow. “I have the sense that Greece is in a Cold War-like state with its debtors, meaning that both sides can push a button and destroy everything, knowing that there will be no winners after that. We all lose.

Bank of America and Merrill Lynch analysts believe that the instability that a rejection of the agreements will result in a failure of the ECB or IMF to provide additional funding, which will lead by July to a default and bankruptcy. Simon Johnson and Peter Boone of the Peterson Institute for International Economics have concluded that it is already too late. So much of the economic community is resigned to the default that no one is prepared to take any actions that will be harmed later by the default and reversion to the Drachma.

When Greece makes the fatal step, the government will default on around 121 billion euros of debt to official creditors and 27 billion euros to the IMF. The Greeks will also default on 155 billion euros owed to the ECB and the 17 national central banks in the euro area.

Greece was expecting 11 billion Euros to enable it to function through June, but that is no longer likely to happen. Sixty percent of the Greek economy depends upon the government, and the loss of the 11 billion will force much of the government to shut down.

The country has not faced the full impact of an economic collapse; and yet, the overall unemployment rate is 20 percent with 50 percent of youths between 18 and 24 out of work and a potential source of unrest. The electric and gas utilities are warning that they will have to cut off service to the country.

Strikes and demonstrations are daily events; and many government services are no longer available. In the past, when Greece faced such problems, the generals marched their divisions into the streets, imprisoned the politicians or exiled them and imposed martial law. Watching the leftists coming to power will be just what it takes to bring the army back into the streets and halls of government.

Felix Imonti is the retired director of a private equity firm and currently lives in Japan. He has published a history book, Violent Justice, and articles in the fields of economics and international politics. He specializes in the Middle East.

Photo by Mehran Khalili (cc).

Tagged under Greece    Greeks    Euro    Eurozone    economic    collapse    economy    electricity    gas    default    billion    army    leftists    Bank of America    Merrill Lynch    banks    Angela Merkel    Alexis Tsipras    Bank of England   
Last modified on Wednesday, 13 June 2012 17:44


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