Two weeks of closed banks, frozen lending and severely limited access to their money have provided Greeks a glimpse of the financial chaos ahead if they let their euro-based financial system collapse.
Economic and political analysts see a reality check behind leftist Prime Minister Alexis Tsipras' dramatic turnaround in pushing Greek Parliament members to support on Friday more painful austerity measures that only a week ago he convinced voters to reject.
Since the European Central Bank halted its liquidity infusions to Greek banks and the Athens government closed them June 29 to slow the flight of euro capital, Greeks whose money is still in banks have been forced to wait in long lines each day to withdraw a maximum of 60 euros — about $67 — and pensioners have been restricted to 120 euros, or $134, each week.
Commerce has evaporated as Greeks spend their limited cash only on essentials. Last-minute tourist bookings have dropped dramatically as vacationers give volatile Greece a wide berth this season. And the government, as broke as the banks, may soon have to issue IOUs instead of paychecks state workers and to keep vital services like hospitals and public transportation running.
Tsipras and his radical left Syriza party had been cavalier about the prospects for Greece being pushed out of the Eurozone and being compelled to issue a parallel currency. That is, they were until economists began forecasting a devaluation of the new currency so sharp that those with savings would be likely to see the value cut by as much as two-thirds.
Creditors holding $270 billion in debt from two previous bailouts for Greece since 2010 have also been signaling in recent days that the Eurozone, the 19 countries of the European Union that use the common currency, has contingency plans in place to minimize ripple effects in case of a Greek exit.
Some noted economists, including Princeton economics professor and author Paul Krugman, hailed Sunday’s decisive rejection by Greek voters of their creditors’ terms for more bridge loans as evidence of an impending “Grexit” and described that course as the best of Athens' bad options.
“Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients,” Krugman said of the creditors’ austerity measures in a commentary published Monday. Greece will have no choice but to pay wages and pensions with IOUs, which will become a parallel currency and eventually be replaced by a new drachma, he said.
“Let the drachma’s value drop, both to encourage exports and to break out of the cycle of deflation,” he advised.
In an open letter to German Chancellor Angela Merkel published in The Nation on Tuesday, five other noted economists, including Jeffrey Sachs and Thomas Piketty, called the creditors' austerity-centric bailouts of Greece a failure. They urged debt relief instead, in exchange for reforms that would stimulate growth.
But Merkel was unmoved and reiterated her opposition to writing off debt owed to European creditors, Germany first among them. Her finance minister, Wolfgang Schaeuble, has since hinted that easier repayment terms might be on offer. But the message to Athens seems to have been received loud and clear: Take the Eurozone's terms for a new bailout or bow out.
Tsipras and his fellow leftists blinked first in their game of chicken with the creditors once word circulated that European partners were prepared to accept a Greek exit from the Eurozone.
Syriza’s flirtation with abandoning the euro was partly inspired by expectations that once Greece recovered control over its monetary policy, it could offer more competitive prices for its vital tourism industry and for important food exports such as olive oil.
“The downside is that they import a lot, about 50% of their foodstuffs and 60% or more of their energy,” Daniel Speckhard, an economist and former U.S. ambassador to Greece, said of the sharp increase in import costs that probably would outweigh any benefits of being free of the Eurozone’s monetary controls.
Worsening poverty could give rise to social unrest and further government upheaval in a country with a modern history of dictatorship and anarchy, said Speckhard, now a fellow at Washington’s Brookings Institution.
Introducing a new currency is a costly and complicated process requiring more than a year of careful preparation to carry off smoothly, said Christian Spaltenstein, Americas manager for AFEX, a global payment and risk management consultancy.
“This is something nobody has planned for. When the euro was released many years back there was never a scenario laid out for someone wanting to go out,” he said.
To replace the euro with a new legal tender for Greece's 11 million people, the government would have to print about 50 bank notes per citizen, a job that would take months and cost as much as $60 million, Spaltenstein said.
“We are at the stage now of making it up as we go along,” John Cochrane, economist and senior Hoover Institution fellow, said of the Greek leadership attempting to keep the economy afloat with a rapidly disappearing stash of euros. “The banks are closed, and it’s clear that the minute they reopen every single person in Greece is going to run to the bank and take out every cent they have.”
If the banks are to open their doors again, they will need a massive delivery of euro cash from the European Central Bank, a provision many of Greece’s Eurozone colleagues consider throwing good money after bad.
One radical option for replenishing the banks if a deal with the creditors proves elusive, Cochrane noted, is the unauthorized printing of new euros at the press in the Athens suburb of Holargos that used to print the drachma.
“They could technically go rogue and print up a pile of euros,” Cochrane said of an Athens government that has been erratic in its handling of the financial crisis since taking office in January. “It would be blatantly illegal but it would get them through a least a couple of days.”