As of midnight European time, Greece has become the first developed country in history to fall into arrears on payments to the IMF. It’s not that much money, by today’s standards: €1.6 billion. But for Greece, which is totally out of money, it’s an unreachable amount. The last time a country did such a thing was in 2001: Zimbabwe.
However the IMF ends up calling it in its institutional mumbo-jumbo, Greece has now defaulted on part of its debt. No one knows what’s going to happen next. Another emergency meeting is planned for Wednesday, so maybe….
Greeks have seen this coming months ago. So they yanked their money out of Greek banks with increasing determination, while they still could, starting last year. They have every reason in the world not to trust their banks. The withdrawals morphed into a “jog on the banks” last week.
When the central-bank spigot that had funded these withdrawals was turned off over the weekend, it brought the banks to their knees. The government, afraid of what would happen next, closed the banks for six working days. But re-opening the banks on day seven is going to be tough, unless new funding arrives in the interim. And Greeks now can’t get their money out, except in small amounts at the ATMs.
Whatever money they have left in the banks is now largely stuck there. All they can do is hope that they’ll get it back someday, in euros, not in drachmas, and not in form of equity in the banks.
But despite the deprivations, they still trust the euro and want to keep it. In the latest poll, done over the weekend during perhaps the greatest financial chaos Greece has seen in recent years, 57% of the respondents wanted to keep the euro and wanted their government to make a deal with the creditors; only 29% wanted a rupture from the Eurozone.
When it comes to money, the Greeks learned a lot of lessons the hard way over many generations. The drachma has always been seen by them as a way for the series of corrupt governments to steal from the people through devaluations and inflation.
From 1981 through January 1, 2001, when Greece adopted the euro, the drachma lost most of its value against the euro and its predecessor, the ECU (European Currency Unit) which was instituted in 1979 along with the Exchange Rate Mechanism and the European Monetary System.
Over these two decades, the drachma plunged from 62 drachmas per euro (1 drachma = 0.0163 cents) at the high point in 1981, to 340 drachmas per euro (1 drachma = 0.00294 cents) on January 1, 2001. An 82% loss in value against the euro in 20 years.
That loss in value included two devaluations.
On October 13, 1985, a Friday night, Prime Minister Andreas Papandreou devalued the drachma by 15%. It came along with some austerity measures to get the deficits and money-printing under control. Inflation was raging at 24% annually. The drachma’s value was going up in smoke in a hurry.
Then on March 14, 1998 – rinse and repeat – the drachma was devalued by 14%. By that time, inflation was down to 5%. As Greece was preparing to accede to the Eurozone, inflation would have to be brought to 2.5% or lower.
At first, the euro was working for the Greeks. The international bond markets, so mostly banks, made nearly unlimited cheap euros available that the government borrowed in dizzying quantifies and handed out liberally. Some of it disappeared through the usual channels to line the pockets of well-connected individuals and companies. Salaries, pensions, and standards of living soared – while they languished in Germany and elsewhere. A lot of Greeks became wealthy. And everyone was happy during those years of folly that culminated with the Olympics.
What Greeks are struggling with now is how to deal with the terrible hangover. But despite the hangover and all the difficulties, and despite whatever “fundamental flaws” the euro might have, Greeks don’t want to leave the euro behind. And they have their reasons….
— Holger Zschaepitz (@Schuldensuehner) June 30, 2015
This is what monetary theft looks like from the Greek point of view, and why they don’t trust their politicians and central bankers in managing a currency. They’ve learned the hard way and won’t forget the drachma’s 82% devaluation against the euro in two decades. But now push has come to shove. And along with the Greeks, the “smart money” too has been left to twist in the wind. Read… Panicked Hedge Funds Now Praying for a Miracle in Greece Test