Regardless of how global markets behave over the next few days, the fact is that the ‘No’ vote in Greece marks a fresh beginning, and not the end of the world. It is not, as of now, even the end of the European Union, or even Greece’s continued presence in it, although a Greek exit from the euro has become a strong possibility. Sovereign defaults have occurred before. Argentina’s debt was restructured in two phases in 2005 and 2010, after it bluntly told the world in 2002 that it couldn’t pay up. The Mexican economy went belly-up twice, in 1982 and 1994. In Greece’s case, a ‘No’ to creditors’ (read Germany’s) terms for further bailouts on the terms currently offered — a further cut in pensions and an increase in value added tax — was always on the cards, considering the ‘austerity measures’ ordinary Greeks had already been put through. Greece had cut pensions and thousands of government jobs as a part of this austerity drive, which led to a wave of discontent which helped sweep Prime Minister Alexis Tsipras and his Syriza party to power. Greece has always maintained that the referendum is only a vote on the terms of assistance, and not on whether it wishes to leave the euro. The ‘No’ vote improves Greece’s negotiating position. The onus is on the troika of the European Central Bank, the European Union and the International Monetary Fund to come up with a plan that pares a part of Greece’s debt (to German and French banks in particular) and reschedules a portion of it over a longer period than the existing average tenure of about 16 years. Triggering a ‘Grexit’ only to deal with so-called moral hazard may stoke anti-austerity fires in Spain, Portugal and Italy, endangering the euro and hurting the economies of Germany and France, if not the world.
The resignation of Greece’s finance minister, Yanis Varoufakis, seems to suggest that Greece, too, would prefer to stick to the euro, albeit on more generous terms. A switchover to its own currency is fraught with uncertainties such as capital flight and the possible collapse of its banking system. However, there is a chance of Russia and China coming to Greece’s rescue through the recently established BRICS Development Bank and Asian Infrastructure Investment Bank. Its creditors must accept this geo-political possibility and act sensibly.
This calls for greater flexibility on part of all the players, something the pressures of domestic politics in Greece and Germany have so far prevented. Turmoil in the Euro Zone could lead to a flight from the euro and emerging market currencies for the safety of dollar assets. While this could hit the rupee, a fall of the sort seen in mid-2013 seems unlikely, as India’s current account deficit and inflation are at much lower levels. Greece’s default — it is a mere $250 billion economy — is not as huge a financial event as it is made out to be. Yet, its referendum is a political watershed. It sends out a clear message — that a club of international financiers and political leaders should not take the mandate of a democratically elected government, in this case against austerity, for granted.