Really, Greece Again?

December 21, 2014

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The Greek financial/political crisis is becoming an annual event. For a sense of just how long this unfortunate little country has been struggling to survive under the relative sound money regime of the eurozone, here’s a Greek Crisis Timeline that CNN published in 2011. Even back then the pattern of near-collapse followed by temporary respite had been repeating for seven years.

The most recent lull seemed longer than usual, so long in fact that many people probably assumed that Greece had been “fixed” and was now a more-or-less fully-functioning member of the eurozone, ready to settle back into its enviable lifestyle of hosting tourists, drinking ouzo and avoiding taxes.

But no. Nothing has really changed. Youth unemployment remains around 50% — which is even more astounding when you consider that tourism is generally a pretty good sector for young people looking for entry-level service work. And the government is still running deficits, piling new debt atop its already unmanageable 175% of GDP.

As a result, anti-euro political parties are still gaining adherents and now seem to have enough clout to start dictating terms. This month a series of elections are being held that, if I’m understanding correctly, have to go the government’s way to avoid regime change in which the far left takes over and begins a process of pulling Greece out of the eurozone. The first round in this voting trilogy didn’t go the government’s way, making the next two highly problematic. And last week the situation got even more complex:

Greek lawmaker alleges bribery attempt in presidential vote
ATHENS, Greece (AP) — A lawmaker from a small right-wing party claimed Friday he had been offered a bribe worth up to 3 million euros ($3.68 million) to vote in favor of electing Greece’s new president, in the latest twist in the bailed-out country’s fraught presidential vote.

Greece faces early general elections if its 300-member parliament fails to elect a president by the third round of voting on Dec. 29. In Wednesday’s first round, the sole candidate and government nominee garnered 160 votes; 180 are needed for election.

Actor Pavlos Haikalis of the Independent Greeks claimed during a phone-in to a live television program that he was offered about 700,000 euros in cash, a loan repayment and advertising contracts, with the alleged bribe’s total value amounting to about 2-3 million euros ($2.4-$3.7 million). He didn’t identify the person, but said he had informed a prosecutor about two weeks ago and had turned over audio and video material.

Haikalis later alleged that the man who contacted him claimed to be acting on behalf of Prime Minister Antonis Samaras and a banker.

Samaras’ office swiftly rejected the allegation as “absolute slander and wretchedness at their worst,” and said the prime minister would presently sue Haikalis and seek a prosecutor’s intervention.

It’s the second claim of attempted bribery from the Independent Greeks, who together with all other opposition parties have refused to back the government’s presidential candidate. Another of the party’s lawmakers claimed last month that someone had approached her with the intention of paying her to vote.

Government spokeswoman Sofia Voultepsi dismissed the allegations as “badly acted theater.”

“It is obvious why these ridiculous performances are set up: so that a president of the republic is not voted for, and the country is led to early elections,” Voultepsi said.

The Independent Greeks’ popularity has been waning, with opinion polls indicating it could struggle to make it into parliament in general elections. The main opposition left-wing Syriza party, which is tipped as a likely winner, had indicated in the past it would consider cooperating with the Independent Greeks in a coalition if Syriza didn’t win enough votes to govern outright.

Independent Greeks head Panos Kamenos called a news conference in which he described the person who allegedly offered the bribe as a “middleman” who tried to persuade Haikalis during more than an hour-long conversation to vote in favor of the presidential nominee. He didn’t identify the man, who he said was a former bank employee. He said Haikalis had been wearing a watch with a hidden camera.

Syriza issued a statement saying Haikalis’ allegations “are not only serious but document the generalized feeling of intervention, pressure and manipulation of lawmakers” in the presidential election.

So, let’s take the status quo’s worst-case scenario, in which Greece ditches the euro and returns to the easy-to-manipulate drachma. It converts all its outstanding euro-denominated debt to drachmas and then devalues its new/old currency by 30 or so percent, pricing its hotel rooms, charter boats and restaurants back into attractive territory. That’s okay on balance for the Greek people, who benefit more from rising tourism than they’re hurt by devalued savings.

But it’s very bad for European banks and US hedge funds that now own tons of Greek debt and will therefore suffer big losses. More damaging still, once the precedent is set everyone will start looking around for the next domino to fall and will find plenty, with Italy (now in the throes of a political crisis of its own) leading the list. That’s a much bigger economy with way more euro-denominated debt, so an Italian exit from the eurozone would be apocalyptic for the whole global financial system.

Will it come to that in 2015? History says probably not. Remember, Greece has been on the verge of imploding for a decade, and each time the money has been found to save it. With the ECB inching towards a multi-year, multi-trillion euro debt monetization plan, the entire Greek economy could be tucked into that expanding balance sheet without a ripple. So expect another wealth transfer from Germany to Greece in the near future. And then perhaps one from Germany to Italy. But also expect some drama along the way.