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Ripples from Greece

If you have been reading about financial crisis in Greece and thinking it was not going to affect you so far away from Greece in Goa, you are mistaken. The world is now a global economic village: something that falls in one corner of the global ocean sets off a ripple effect down to other corners. The good news is that the ripple effect is warded off for a while as Alexis Tsipras, the Prime Minister of Greece, has scaled down from his tough stance and announced he was ready to accept the bailout conditions of his country’s creditors – the IMF (International Monetary Fund), the ECB (European Central Bank) and the Euro zone governments. Greece owed €323 billion to its creditors. It was due to pay €1.6 billion to the IMF by June 30 which it failed to do. It has to pay €3.5 billion to the ECB by July 20 and another €3.2 billion to it in August. For the last fortnight the country tried to negotiate with the IMF and other Eurozone countries for €7.2 billion in new loans to help pay old loans. The creditors demanded that Greece make some reforms and cuts before they handed over fresh loans. Tsipras said no. But he now has said yes.

The scenario with Greece refusing to pay back loans to IMF, ECB and European Commission was frightening for Europe. But India was not completely insulated. If Greece defaulted it would eventually go out of Europe. Investors would flee from other economically vulnerable European countries such as Portugal, Spain and Italy, fearing they might go the Greece way. The blocking of creditors’ €323 billion as non-paying assets would put some squeeze on lending by them to other nations of Europe. The currency euro and bond and interest rates in Europe would be adversely affected. The stock markets of Europe would register a big fall. If Europe was thus affected India could not remain untouched. A good deal of stock market vibrancy in India comes from capital inflows from Europe. If the capital inflows to and outflows from India were affected, stock markets would be depressed. If Europe was affected Indian shipments would fall. Europe was India’s largest trading partner with $129 billion of merchandise engagement in 2014-15. Of this the European Union bloc accounted for $99 billion with the UK, Germany, France and Italy being the leading partners. India’s software exports to Europe too would take a hit.

With Tsipras accepting creditors’ conditions, the fears associated with this scenario might recede for a while. But the onus would be on Tsipras to lift Greece out of the morass. Tsipras leads a left front that was elected this year with a mandate from people to change the script on negotiations with creditors. The majority of Greeks do not want more austerity measures such as cuts of public sector jobs, wages and pensions which the creditors want to impose on Greece as conditions for new loans. The people of Greece have got sick of austerity. Unemployment has risen to new highs, wages have been substantially cut and pensions reduced. Public sector institutions such as universities, schools and hospitals are starved of funds.

Yet Tsipras has no way but to make the hard choice. He has to cut down on public spending and put more money in investments that would generate taxes and other income for the government to be able to pay back the loans. Non-repayment of loans would mean Greece going out of the euro and out of Europe. Greece can’t survive on its own. It has no money: it has drawn on cash reserves from councils, hospitals and other public bodies. Greece’s banks have no money; they are surviving on emergency credit from the European Central Bank. Without that, they have had to impose capital controls to stop any more money going out.  Greek people are queuing up at ATMs and drawing money. Withdrawals are capped at just €60 a day. Banks of Greece will collapse with the country going out of the euro zone. No wonder, even while the Greeks want Greece not to capitulate to its lenders for enforcing job, wage and pension cuts they do not want the situation to precipitate to the country’s exit from Europe. Having come to realize this duality in popular thinking, Tsipras has agreed to accept the creditors’ conditions. The people of Greece would expect the creditors to be considerate and not impose very harsh reforms on the country. The reforms must be designed in such a way that it mitigates the pain and suffering of the Greek people and not aggravate it.

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