The purpose of this article is not to say anything different to what has already been said but to put everything together in a way that is understandable, because let’s face it, we live in a global economy and events happening around the world have a direct impact on us as individuals.
What actually happened?
The current Greek government won the election by promising the people of Greece an easy way of life (no different to what many politicians promise). The easy way of life came in the form of easing austerity (this word has been thrown around a lot and what it means in this instance is that policies were put into place to reduce taxes).
The Prime Minister of Greece, Alexis Tsipras promised the following (to name a few):
- A fair tax system
- Re-employ all public sector employees who were previously retrenched
- Free electricity
The problem with this plan is that there was no real mechanism for funding all these promises.
The promise of reducing Greece’s deficit was doomed from the beginning since additional funds would need to be borrowed to fund all the benefits promised to the people of Greece. The money being received by the Government in the form of taxes was less than expenditure incurred, resulting in a growing debt to GDP ratio.
The other problem that exasperated the situation of inflow of funds in the form of taxes, was that the level of tax evasion was too high i.e. taxes were not being paid and there was no immediate action taken to identify tax evaders and impose penalties and punishment in order to send a clear message that tax evasion will not be tolerated.
What about the Euro-Zone?
The International Monetary Fund (IMF) had bailed Greece out when it was unable to make payments to its creditors. Greece has since defaulted on the payment of approximately 1.6 billion Euros to the IMF.
This resulted in discussions on a way forward for Greece. The creditors have made certain proposals to allow extensions on payment. The Prime Minister of Greece called on a referendum to be made (a general vote by the Greeks in order to come to a decision on whether to accept the proposal or decline).
In order for Greece to remain in the Euro zone, it must accept the terms and conditions imposed by the European Union (EU).
The picture below explains the outcomes (Source: Bloomberg Intelligence):
So what if Greece exits the Euro?
The European Union is made up of an agreement held by 19 heads of state. The exit of Greece from the Euro may cause a domino effect on other countries that are in crisis like Spain, Italy and France as mentioned by Chris Hart in an interview with Moneyweb.
For Greece, the exit will mean:
- No borrowing capability from European countries
- Legal disputes for business who will be forced to trade on dual currency during the transition
- Companies unable to pay debts to foreign lenders
- Living standards would drop
- Greece falling into recession
These are a few effects as a result of the Greek exit (commonly referred to as Grexit) - information adapted from BBC News.
For the rest of Europe, the “Grexit” will have the following effect:
- Investment may be cut due to fears surrounding the stability of the Euro (This has a particularly dire impact on investment in developing countries)
- Cut back on spending may cause the euro-zone into recession
- The Euro may lose value in the currency markets, this may promote export for Europe but imports from the US, Japan and China will be more expensive.
- In South Africa, we will be impacted by the Rand/Euro currency and investment.
- Since Europe as a continent is South Africa’s largest trading partner, a recession in Europe will have negative effects on South African Trade
No further action is anticipated until after Sunday’s (5 July 2015) referendum is reached. Alexis Tsipras, the Greek Prime Minister will be backing a ‘no’ campaign.
So, should you be planning your next holiday to Greece anytime soon?
Greece remains an attractive tourist destination. What the current situation does mean though is that tourists may have to carry around hard cash in order to make payments and this should be in small denominations as some shops and restaurants do not have enough change for large denominations of cash.
Having said this, you may also want to be a bit more vigilant as pickpockets will be on the rise given the knowledge that tourists are carrying around lots of cash.
It is unlikely that you will experience protests outside of the city centre of Athens. Many of the beach resorts and popular tourist spots are continuing business as normal.
This article is merely a simplistic explanation to give you, the reader a basic understanding.