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Greece on the edge

Greece on the edge

Three years ago Greece was on the precipice of exiting the eurozone. Its government called a snap election that was essentially a vote on whether or not the Greek people wanted to accept Greece’s creditors’ demands of more austerity in return for bailout cash.

Back then the country voted with the creditors, and Europe’s most powerful institutions stood ready to do ‘whatever it takes’ to protect the currency bloc.

Those fateful words from ECB President Mario Draghi helped to stabilise the situation for a while, but now that those funds are due to be repaid, the problems that plagued Greece three years ago are once again coming home to roost.

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This time the political stakes are even higher. Firstly, the radical left-wing Syriza government has ruffled feathers in Brussels and failed to bend to its creditors’ demands. Secondly, other European member states have successfully managed to exit bailouts, return to capital markets, pay back some of their creditors and return to growth. Ireland, and to lesser extent Portugal, do not want Greece to get off lightly and get more eurozone cash without having to endure the same stringent conditions that were applied to them.

The deadlock between Greece and Europe continues, but meanwhile the Greek banks are shuttered, capital controls have been imposed, medicines and other imports that Western countries take for granted cannot get through because they can not be paid for, and tourism has slumped. The crucial difference between now and 2012 is that now there is no appetite to do ‘whatever it takes’ to save Greece, which could have large ramifications for the future of the currency bloc as we know it.

Much focus has been on the Greek request for a bailout, which would total approximately €7bn (£5bn). While this dominates the rounds of Eurogroup meetings and EU summits that we have seen in recent weeks, the real problem is the Greek banking sector, which requires many hundreds of billions of euros to get back on its feet.

In recent months the banking system has been resorting to emergency liquidity assistance from the ECB. These funds used to have a stigma attached to them. However, by the time you have borrowed €130bn (£93bn), you are probably used to it. The ECB recently stopped increasing the amount of money available to Greece via the ELA, which is why the banks had to be closed and capital controls imposed.

The real decisions about whether Greece stays or goes may not be made in Brussels, but in Frankfurt, the home of the ECB. If the ECB asks Greece to start repaying the €130 bn of ELA funds then the banking system will more than likely collapse overnight, as it has no way of paying since there is less than €1bn (£718m) left in the banking system after a torrent of deposit withdrawals in recent months.

Can a country continue to remain in the eurozone if its banking system collapses and it has no means of external financing? How can one body, the ECB, set interest rates for a country without a financial system? For these reasons we think that Greece will find it very hard to remain in the currency bloc, especially since the ECB seems to have shown that ‘whatever it takes’ has its limits, and does not apply this time around.