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The Future Of Greece? Five Key Clues For The Oracle

Waiting outside a bank in Athens, on July 6, 2015.
Waiting outside a bank in Athens, on July 6, 2015.
Giacomo Tognini

Amid all the talk of debt, defaults and deadlines, it isnot easy to understand just what is actually going on in Greece. After yesterday's momentous referendum, we shine the spotlight on five key points to offer a way out not only for Greece and the Eurozone, but for the rest of us on information overload:


Perhaps the single most crucial player right now is Mario Draghi, president of the European Central Bank (ECB), who was already on the phone early Monday with Greek Prime Minister Alexis Tsipras. Last week, following rampant withdrawals from Greek citizens seeking to protect their funds, the ECB limited emergency liquidity assistance (ELA) to Greek banks to 89 billion euros. The decision forced the Greek government to impose capital controls, and banks imposed a cap of one withdrawal of 60 euros per day for holders of Greek bank accounts.

Now that voters firmly rejected the austerity terms of the bailout agreement, Draghi must decide whether to continue providing funds to the Greek banking system — which is rapidly running out of money, with only around 1 billion euros left — or turn off the tap, causing a collapse of the Greek banking system. The failed banks would then appeal to the central government for help, but since Athens is already bankrupt as of last Tuesday, it would have to emit "IOUs" in lieu of actual euros, effectively creating a parallel currency. This would be a prelude to the formation of a "new drachma," as Greece has no ability to print euros unilaterally and the ECB's suspension of assistance would render the country devoid of cash.

Italian financial newspaper Il Sole 24 Ore reports that the ECB may offer a temporary loan while negotiations continue or use unspecified "new measures" to avert the impending economic catastrophe. So if the fate of Greece rests squarely in the hands of Draghi, are there clues to what he might do? He once famously declared he would do "whatever it takes" to save the euro. He also has been dubbed "Super Mario." To the rescue?


Greek Finance Minister Yanis Varoufakis announced his resignation early Monday morning despite being vindicated by the "No" victory in the referendum. In an effort to improve Athens' prospects for a quick deal with its European creditors, the quixotic former economics professor decided that the widespread aversion to him shared by many European leaders would be an obstacle in the coming days of negotiations. French newspaper Libération reports that Euclid Tsakalotos has been sworn in as his successor.

Tsakalotos is an Oxford-trained economist and was previously the deputy minister of foreign affairs. He is close to Varoufakis both personally and in economic thinking, but has a reputation as a calmer negotiator. The outgoing minister endorsed Tsakalotos for the post.


Last Tuesday Athens missed a payment of $1.7 billion to the International Monetary Fund (IMF), and has since been technically in default. Greece's GDP has contracted by 25% since 2008, which according to Il Sole 24 Ore is the worst recession for any advanced economy since World War II.

The next key date is July 20, the deadline for Greece to pay back 3.5 billion euros owed to the ECB. With the government already effectively bankrupt and its banks perilously close to the same, some economists are urging a rapid "Grexit," which Nobel laureate and New York Times columnist Paul Krugman writes would allow Greece to establish a new currency — the drachma — and let it strongly devalue, a move that helped both Argentina and Iceland recover from economic collapse in 2002 and 2009, respectively.

An alternative proposed by the Greek government is to stay in the Eurozone but obtain the cancelation of a large portion of Greek debt, though this has been widely rejected by European leaders after the 2012 bailout by the so-called "Troika" of the IMF, European Commission and European Central Bank moved virtually all of the country's debt from private to public hands. Given this reluctance, French daily Le Monde reports German Economy Minister Sigmar Gabriel saying that a new bailout is "difficult to imagine."


Fears are rising that a Greek exit from the Eurozone could spark contagion to other weak European economies. The Guardian reports that soon after news of the referendum results broke, yields on government bonds in Spain, Italy and Portugal rose by over 2%. Yields move inversely to prices, meaning that those countries' debt is now less attractive to investors after Greeks voted no. But leaders have consistently asserted that the risk of contagion is far lower than it was in 2011 at the peak of the previous euro crisis.

Speaking toLa Stampa, Italian Prime Minister Matteo Renzi emphasized how Italy's recent record of reforms could provide a "third way" between austerity and bailouts. In Spain, another country hit by recession but not saved by bailout, Finance Minister Luis de Guindos said Greece "must stay in the euro," according to Madrid-based daily El Mundo. He expressed willingness to find a solution to the crisis, but noted that Spain underwent painful reforms and Athens must accept some of the same rules.


A last resort for Greece in case it is forsaken by the ECB is to look eastward to Russia and China for help. Tsipras spoke with Vladimir Putin on Monday, and the two have established close relations since the Greek leader was elected in January. But it is difficult to see how Moscow or Beijing could come to Athens' aid. Russia's economy is still reeling from a fall in oil prices, which fell further today, and international sanctions as a result of Putin's actions in Ukraine. China's stock market has been in freefall for the past three weeks, causing serious concern about the stability of the world's second-biggest economy.

According to Reuters the Chinese central bank flooded the market with new cash, lending liquidity to investors and borrowers to reverse a trend that eliminated $3 trillion in stocks. As Moscow and Beijing look inwards to prop up their own economies, the BRICS — composed of Brazil, Russia, India, China and South Africa — will hold a summit Thursday in Ufa, Russia. Kathimerini writes that a decision hasn't been made yet as to whether Tsipras will be invited to the meeting, and speculation has been mounting since March that Greece could potentially be invited to join the club of emerging economies. BRICS manages its own financial institution modeled on the World Bank called the New Development Bank (NDB), which could in theory bail Athens out if it joined the organization.

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