The looming possibility of Greece separating itself from the Eurozone has yet to reach panic, but has managed to spark fear in many Greeks. Just late Tuesday of last week, in what has been known as a miniature ‘run-on-the-bank,” the Greek population withdrew 800 million Euros from the Greek banks, fearing the depreciation caused by a possible switch to the pre-Euro drachma. Although the European Central Bank (ECB) President Mario Dgaghi states that the ECB will continue to support the Greek banks, the ECB has stopped providing loans to certain Greek banks until recapitalization takes place to limit risks, which has led to a decline in European stocks. Despite Draghi’s desire to keep Greece in the Euro-zone, time and time again last week, he repeated that the European Central Bank “can’t be the lender of last resort.”
German Prime Minister Angela Merkel has expressed her desire for Greece to remain within the Eurozone. However, she is also the leading advocate for the tough austerity measures that recent bailout plans had installed. The last elections held on May 6, denied the Greek coalition that had agreed to such bailout terms the ability to form a new government, which had forced the upcoming June 17 elections.
With no party having more than 20% of the seats required to form a government, the Syriza party, which had nearly 17% of votes has become an expected majority in the upcoming elections. As a firm opposition to austerity measures, the Syriza party has gained Greek votes and will continue to increase the likelihood of a Greek default. The fear and expectations of many Europeans is that the Syrizan party will deny the already installed austerity measures of the bailout terms. Alexis Tsipras, leader of the Syriza party, vowed that if the European leaders do insist on the continuance of austerity measures, the result will be a default of Greece from the Euro-zone. With the belief that the debt crisis is a European crisis and not just a Greek crisis, Tsipras feels that through renegotiation of all European public debt, as well as the use of the European bonds, the austerity measures could be avoided. However, if he does not meet the required progress expected by the troika, there is a strong likelihood that the 5 billion expected bailout payment will be withheld.
Without that 5 billion bailout payment, it is likely only a short period of time until money runs out and Greece will have no choice but to use IOU’s to fund salaries and bank recapitalization, and the probability of a full bore “run-on-the-bank” will become very likely. (That may be one of the first “stealth” runs on a banking community and may occur without long lines at branches as many withdrawals and transfers can and are being done electronically over the net.)
While over the weekend, the Group of Eight (G8) nations met and reaffirmed their commitment to keeping Greece in the Eurozone, European leaders have shown no expectations to compromise key elements for the support of an anti-austerity Greece. At least in recent polls, the G8 may have some support; two opinion polls released in Greece reportedly put the pro-bailout New Democracy party ahead of the anti-austerity Syriza party.
While it is unclear as to the exact consequences that will be placed on Europe resulting from a Greek exit, it is clear that the effects will have international presence. The uncertainty of Spain and Italy will grow, and the U.S. economy will surely become shadowed under the effects of the European markets.
William Doane, International Business Coordinator at Norris McLaughlin, contributed to this post.