Any failure to meet austerity commitments to the European Central Bank, International Monetary Fund and European Commission next month by Greece will see the next tranche of loans not being paid by the troika of at the end of February. As liquidity from the ECB to Greece’s banks dries up, a banking crisis will ensue.
Not surprisingly, private money is already heading for the door, some €8 billion of deposits have been pulled since November when the election was called. So, who will blink first? Syriza or the troika?
It is clear voters in Germany, Finland and the Netherlands, do not want their taxes used to underwrite a blank check for countries that get into financial trouble.
“Ultimately, this is a clash of democracies, rather than a clash of ideas,” Mats Persson, director of Open Europe, a research organization in London is quoted by the New York Times as saying. “Voters in Germany and Greece want very different things.”
More than that, he adds this understatement: “Germans and Greeks have fundamentally different views on how to run an economy.” Don’t they just. But you can see the Germans’ point of view. Of all the bailout money provided to Greece, Germany has been the largest contributor. Their contribution is all in the form of loans that have not yet fallen due.
If Greece defaults, the German taxpayer will largely foot the bill. Nor does the European Union want to set a precedent by allowing Greece to renegotiate its position and end the austerity drive but maintain the bailout funding. The risk of contagion, not for an exit but for a renegotiation, is high. In Spain Podemos, a party similar or at least highly sympathetic to Syriza, leads the opinion polls and national elections are due next year. Germany really can’t afford for a major relaxation of rules for repayment or the drive to collect more taxes and balance the books. As they see it, if they let Greece off the hook Spain could be next, then Italy and you can bet France would be right behind.
So, we are set for a clash of ideologies, and at the moment neither side has given the slightest hint they intend to back down. Inevitably that is going to cause considerable foreign exchange, stock market and, by association, commodity volatility, particularly in Europe. Banks across the region will be seen to be at risk, some of whom have been major players in commodity financing. If they cut their risk profile to shore up their positions they may well start with commodity financing. Syriza has won an important victory, but a new chapter of European instability is only just beginning.