Debts incurred by sovereign nations are not treated like those run up by individuals – which is as well for Greece, for after it missed an International Monetary Fund repayment of €1.55 billion ($A226 billion) on Tuesday bailiffs might have descended on Athens surrounded by locksmiths and security guards. For months, the Greek government had been negotiating with its creditors (the IMF, the European Central Bank and the European Commission) for a partial debt cancellation and more money to bail it out of its increasingly precarious financial situation, while resisting their demands for further economic reform. Last week, however, Prime Minister Alexis Tsipras announced a referendum to let Greeks decide for themselves on whether the country should agree to the troika's demands that public spending be cut and taxes raised before more bail-out funds are released. The tactic infuriated the troika, which promptly took the deal off the table. Nevertheless, Sunday's referendum will proceed.
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Many are viewing it as a referendum on Greece's continued membership in the Eurozone, though this is not strictly the case. Nonetheless, a No vote seems likely to precipitate an eventual departure, even though Mr Tsipras (whose Syriza government is campaigning for a No vote) has denied that this is his ultimate goal. Instead, he argues the referendum is about firming Greece's negotiating position, and that a No vote will hand Syriza the necessary mandate to resume talks and strike a better deal. The troika's strategy may be easier to divine, but it is no less explicable. They seem in no mood to extend Greece any financial favours whatever, which has been interpreted as a desire to see Greece off the Eurozone premises. But, publicly at least, they are still talking up hopes that the southern Europeans come to their senses, agree to accept further austerity measures and retain the Euro as their currency.
Greece's predicament has been a long time coming. Some suggest it began the moment it was admitted to the Eurozone in 2001. The preconditions for entry were strict, as were the fiscal requirements for on-going membership, with agreed limits on deficits and national debt. Greece massively understated the true scale of its budget deficit to enable its admission, and never really got to grips with the requirement that member countries keep their yearly deficits below three per cent of GDP. Worse was to follow. Granted access to low-interest loans for the first time, Greece's public spending ballooned. The economy boomed for a period, but the country was clearly spending beyond its means. The erosion of the country's tax base by a large black economy was another major problem. The global financial crisis of 2008 cruelly exposed Greece's economy as a debt-laden house of cards, and its slow descent to bankruptcy since has created great consternation within the rest of EU, and particularly Germany.
Some blame for Greece's predicament must attach to the EU's northern European members, however. Their decision to extend the single currency to countries like Greece, Portugal and Ireland was viewed with considerable skepticism at the time, with many economists questioning how less well-developed economies could cope with bubbles or crises when deprived of the ability to devalue their currencies – the usual remedy to such emergencies. Not very well, as it turns out. Large European banks willingly lent to Greece (despite clear signs of its limited capacity to repay) knowing the ECB would intervene to see these debts were repaid.
The ECB could, theoretically, have written off some or all of Greece's debts. That of course would have sparked demands from other highly indebted Eurozone members for debt forgiveness. Instead, the European Commission, at the behest of the Germans, settled on a tough-love approach, offering bail-outs with strict conditions attached. Those proscribed austerity measures have created considerable hardship for many of Greece's 11 million citizens, and shrunk its economy by 25 per cent since 2008.
Any objective evaluation of Greece's current situation would conclude it was better off out of the Eurozone. But, whether out of pride or stubbornness, Greeks appear unwilling to follow Mr Tsipras's injunction. A Yes vote will likely plunge the country into political crisis (with no sign whatever of the troika softening its demands) while a No vote will precipitate a period of turmoil and uncertainty. Greeks are caught between a rock and a hard place.
