By Ruma Dubey

As the world stands witness to an unfolding Greek tragedy which could change the entire geography of Europe, take time to read this “longish” essay on the who, why, what and where of the crisis.

What exactly is the Greek crisis?

The immediate problem is that, Greece is broke and does not have the money to pay, 1.5 billion Euros as the instalment due to IMF. The deadline in Tuesday, 30^th June. In all probability, it will default.

And what happens if Greece defaults?

There would be a contagion effect, leading to fear of defaults all across Europe. First and foremost, Greek banks would go belly up. It also puts in jeopardy the various loans to Greece – Germany, France and other private investors hold 34.1 billion Euros of Greek debt. EFSF owns 131 million Euros, Greece owes 26.9 billion Euros to ECB, it owes 21.1 billion Euros to IMF and various EU governments have lend 52.9 billion Euros. So if Greece defaults, we will pretty much see the tremors all across Europe.

So how did it all begin?

The roots of this crisis can be traced back to 2009 when Greece, for the first time, announced a budget deficit of 12.9% of the GDP – 4 times higher than European Unions (EU) 3% limit. In 2010, Greece announced an austerity package to bring down the deficit to 3% of GDP by 2012. But within four months of announcing this, Greece was once again on the verge of a default. To prevent a default, the EU and IMF bailed it out, providing 240 billion Euros and imposed stricter austerity measures. Greece used the money to pay up the interest on the debt and keep banks afloat. Austerity measures went on to choke the already clogged economy of Greece, with unemployment rising to 25% with riots breaking out on its ancient streets. There was social unrest and a political upheaval.

In 2011, European Financial Stability Facility (EFSF), another EU funded unit gave Greece a bailout of 190 billion Euros. Things did not improve even then.  In 2012, its debt to GDP ratio zoomed to an unbelievable 175%, three times the 60% limit prescribed by the EU. Bondholders exchange $77 billion for debt worth 75% lower.  In the midst of this, political crisis also loomed large. Another austerity plan was put in place to seek 135 billion Euro from EU and IMF. This was the fourth bailout in three years. Unrest remained, unemployment rose to 26.8% with 60% of the youth unemployed. In Feb 2014, unemployment rose to 28%.  Greece raises nearly four billion dollars from world financial markets in its first sale of long-term government bonds for four years – but that’s like a small drop in its ocean of debt.

In May 2014, the radical leftist Syriza coalition wins election and in 2015, Alexis Tsipras of Syriza becomes prime minister, a big supporter of anti-austerity. A deadline for payment had loomed large in Feb 2015 but Tsipras managed to get a 4-month extension in exchange for dropping anti-austerity measures and adopt some Eurozone approved reforms. And now, that four moth is getting over and Greece has delayed payment of IMF instalment and thus fears are rife that it will now default.

What is the current situation?

The crisis is at its peak. Last week, the creditors had said that they could avert this crisis with a bailout or extension if Greece agreed to pension cuts and increased taxes. This was not acceptable to Tsipras who said that it would only further deepen the crisis. So over the weekend, he rejected the terms of the creditors and called a referendum on the bailout. A referendum is like going back to the polls – only here vote is sought from the electorate on a single question. And here, the referendum will be held on 5^th July.

So currently, no one knows what could happen. To prevent further flight of capital adding to solvency and liquidity strains, banks and bourses have been shut for the week and ATM withdrawal per day is restricted to 60 Euros.

What if the referendum gets a majority of “NO”?

As of now, the mood is for a “NO”.  In the voting that took place on 28^th June in the Greek parliament, to decide whether to go for a referendum or not, 178 MPs voted for holding the referendum and 120 against.  And as of now, the support is more for a “NO”. All other ministers have clearly stated they support a “no”. Tsipras himself, his entire party and even his coalition are for a “NO”.

But a survey of the Greek populations suggests that people of Greece might actually vote a “Yes”. And that would mean that they give a consent to more austerity and a long, never ending process of recovery. It would also mean that Tsipras Govt will go and Greece would have new elections.

And if they vote a “NO”, one is not yet certain that it means Greece will be shown the door from the EU but common sense says that it could be shown the door. 

What happens if Greece exits the Eurozone?

Majority of the Greek do not want to exit the EU; they want the Euro as their currency but do not want the austerity measures.  This inconsistency will thus be resolved on 5^th July.  And if Greece exits, there would be no more bailouts. It will have to get rid of the Euro as a currency and start printing drachma. Once in place, the drachma would plummet , inflation would jump to double digit, imports might be restricted and even food and gas could get rationed. Something like what happened in Argentina.  This would be the immediate pain but in the longer run, if the Govt does show the will and dynamism, couple of years from now, Greece could a cheaper drachma, making it a great tourist destination and exports will get competitive.  Essentially, there is no gain without pain. But on the bigger picture, if Greece does manage to get back on its feet after exiting EU, it could tempt the others to do the same. And that for the EU is the bigger worry.

Is there a chance of a compromise?

There are many who say that Tuesday will be decision time and the ECB will not wait for the referendum. It will call the bluff and put pressure on the Greek Govt to make a decision and not wait for a referendum.

And come to think of it, a deal is not exactly that elusive. Tsipras is not exactly against the austerity – he is willing to cut the pensions by half of what the EU has prescribed and make up for the rest with higher taxes. The EU wants  more cuts and higher taxes. So the issue is not about how much austerity but how to bring this austerity. EU has taken a “take it or leave it” stance to send out a warning to other nations – Spain and Portugal too. Currently both sides feel that there simply cannot be any negotiations.

How will this Greek saga affect India?

Exports could face a decline given the crisis into which the entire region could get into. India’s 20% exports come from Europe and that is pretty substantial. So it would not be the fall of Greece directly but the translational or indirect effect which could leave a telling but temporary effect.

What does an investor do in this scenario?

This could prove to be the best time to cherry pick some quality stocks. Europe tremors will be felt but our foundations will not come crashing down. So buy into good quality stocks every time the market falls because the story of India remains good.