<div><em>With 180% of debt-GDP ratio, falling growth rates and a staggering unemployment of 40%, another default is due very soon, writes <strong>Sanjay Banerji</strong></em></div><div> </div><div>Finally the great Greek tragedy has been averted as the warring sides have conceded to each other in the game of chicken where the loser is the first one to bow to the pressure of the opponents. The Germans gave a reluctant nod to the third bailout plan promising the Greeks €80 billion in exchange of a series of reforms curtailing pensions, privatizing government assets, raising taxes and other painful measures. The left wing Greek PM had to swallow the bitter pills, rejected outright by his countrymen in last month’s referendum. The deal reached after a lot of teetering and angry exchanges in a marathon 19-hour meeting finally saved Greece not only from the immediate exit from the Eurozone but also from the consequent financial, social and economic disaster. </div><div> </div><div><table align="right" border="1" cellpadding="1" cellspacing="1" style="width: 200px;"><tbody><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/sanjay200.jpg" style="width: 200px; height: 200px; float: right; margin: 1px;"></td></tr><tr><td><strong>Sanjay Banerji</strong></td></tr></tbody></table>It turns out in the hindsight that the risky Greek manoeuvring paid the country off at least temporarily. First, the referendum bought all parties more time in negotiations and meanwhile soothed their frayed nerves. Tactically also, a solid no to austerity demands from creditors brought the latent cracks within the coalition of 19 countries in Eurozone. Much to the chagrin of the Germans, the vocal French supported the new Greek proposal for the third bailout plans. The Italians and Irish scratched their heads with indecisions. In the crucial Sunday meeting, the French support made to Greece was not out of any special affinity with an ancient civilization but from the country’s concern for German domination while the Irish knew that they could be in the line for a future bailout in case of another jolting economic shock. </div><div> </div><div>The inner division among the Europeans, US concerns to prevent a NATO ally from defecting to Putin’s camp, and IMF’s (an important creditor to Greece) open stand against austerity (elaborated in a recent key document) got Greece new allies which forced the German camp to backtrack the hawkish path and work out a compromise formula before the end of that long day. Without this consensus, Greece by now, would have been on the road towards an ignominious exit from the Euro zone with immediate disaster writ large all over. </div><div> </div><div>The expulsion was not to be thrust upon Greece by force because there is no ‘exit clause’ in the Euro system. The Grexit, if it were to happen, would be purely banking and monetary phenomena. The rush by panicky depositors in recent weeks to withdraw fund dried up Greek Banks’ liquidity. Under normal circumstances, shortfall between withdrawals and deposits are made up through loans from the interbank system or by emergency funding from the Central bank. With Greek Central banks running an arrear of more than €100 billion with others and freezing of the ‘emergency liquidity assistance (ELA) by the European Central Bank, the Greeks have nowhere to go. To ensure daily transactions of goods and services and payments to parties and a smooth flow of credit, the Government under these circumstances had to issue either IOUs or print Drachmas. Only then enter the Grexit with all hell breaking loose! The value of the new currency would have gone south with issuer’s credibility reaching its nadir, causing destruction of payment system or hyperinflation or anything in between. Last week’s agreement of the sparring 19 nations thus saved Greece from the imminent financial hara-kiri. Did it then resolve all the problems for good? The answer is an unambiguous no. </div><div> </div><div>The Euro is an empty political dream wrapped by a monetary union without being backed by a reasonable degree of fiscal and banking unions. In good times nobody feels the pinches of the fissures within the system. But the bad times bite with a vengeance because no sustainable and durable mechanism can work without an agreeable degree of comprehensive union. The essence of resolving pains of bad times is finding a mechanism that redistributes losses among stakeholders in a fair, equitable and efficient manner. It is not forthcoming without an union of the trinity. </div><div> </div><div>To take a concrete example, India and US are two different countries in many dimensions but both have the fiscal, monetary and banking unions. When New Orleans or a part of India are battered by natural calamities, the Federal Governments in both countries can ship relief to the affected areas and finance it by taxing other regions. Fiscal and monetary union work in unison and losses are shared by the citizens and a single currency facilitates the effort by lowering transaction costs. The same orderly principle applies for resolution of bad banks no matter whether they are located in Mumbai or Chennai. </div><div> </div><div>In 1992, India was in the brink of disaster as her available foreign currency reserves then could meet only two week’s bill of oil imports. The country instituted fiscal, monetary and banking reforms and had her currency depreciated by more than 50 per cent in a short time. She became competitive in export markets and stood on her feet within a short time. The reckless borrowing by Greece and irresponsible lending by creditors made her debts explode and to carry on the country needs a debt relief as austerity impacts GDP adversely. Without fiscal union, other parties are not keen to share this burden of debt payments and with no currency of her own to depreciate, competitiveness in export is not forthcoming either! The country is at the receiving end on both accounts. </div><div> </div><div>It is a safe conclusion that with 180 per cent of debt-GDP ratio, falling growth rates, staggering unemployment of 40 per cent, another default is due very soon. The Eurozone countries last week diffused a ticking time bomb but replaced it with a new one. Will it explode at its time of maturity in 2018 or even before? Well, the answer lies in the following much heard maxim in the street. "If someone defaults $1000, he is in trouble; If the person defaults a million, then his bank is in trouble’’. When the figures reach billions, the sound of financial tsunamis reach all important corridors in both sides of Atlantic. </div><div> </div><div> </div><div>(<em>Sanjay Banerji is currently Professor of Finance at Nottingham University Business School and head of the Group. Prior to joining Nottingham, Professor Banerji had taught in McGill University in Canada and Essex University Business school and had been a visiting Professor to University of Athens and Concordia University. He has also been a visiting scholar to Finance Ministry in India. He has published in major Journals of Finance of International repute and has interests in Corporate Governance, International Financial markets and India's political economy and Financial Markets</em>.)</div><div> </div>
