Suffocating from colossal debt, Greece has until July 12 to secure a third bailout from creditors. Otherwise, the country may make a swift exit from the eurozone, a move that could significantly damage the global community.
We discussed the Greek debt crisis — and what lies ahead — with Ashoka Mody, the Charles and Marie Robertson Visiting Professor in International Economic Policy at Princeton University's Woodrow Wilson School of Public and International Affairs.
Mody previously served as director for the International Monetary Fund's Research and European departments. He also held several management positions at the World Bank.
Q: The Greek electorate voted "no" on a new bailout. Why? Is this what you expected?
Mody: If I had had a vote, my heart would have voted no with the Greek majority, but my head would have been on the fence. The Greeks have a right to their dignity, and, in my opinion, they were being treated with disrespect. Also, the European creditors acted in bad faith by either delaying or suppressing any analysis that Greek debt needs to be forgiven. I understand that no matter how the Greek people voted, yes or no, the result would have meant more pain for them.
Q: If a deal isn't struck soon, what will happen to Greece's international debts?
Mody: Either way, it is highly unlikely that Greece will ever repay the international debts that it owes. The choice now is really between a messy default and an orderly debt relief operation.
Q: Will Greece leave the 19-nation eurozone? How will that affect global finance?
Mody: This is the big unknown. I think, in the end, there is still political incentive for the European creditors to retain Greece in the eurozone. The problem is that the creditors are not ready to see that debt relief will benefit them as well as Greece. Unless that red line is crossed, the risk of Greece leaving the eurozone will remain live.
Although many claim that there will be minor effects on global finance, I worry that the effects will snowball. This will be all the more true if the Chinese economic slowdown and stock market correction interacts with the Greek exit and together the two have much larger than anticipated effects.
Q: If Greece transitions from the euro and to another currency such as the drachma, what effect will this have? How will this impact the international economy?
Mody: The value of the drachma will probably be a fraction of the euro. If all Greek contracts are denominated in drachmas, Greeks will not be able to repay their euro debts. Creditors will face losses. And Greeks will be temporarily cut off from international financing. But over time — and it is hard to know over how much time — the lower value of the drachma will allow more Greek exports of goods and tourism. And the Greek economy should gradually begin to recover.
It will all be very messy — especially because the global economy and finance may be temporarily damaged — but I have faith that the Greeks will eventually come out of it. Their standard of living will have fallen sharply because the drachmas will command a lot less in terms of imports, and so the Greeks will have to sell more to buy what they need from abroad.
Q: At this point, is there any way to save Greece?
Mody: All options are bad. The cleanest is substantial debt relief and reduced austerity. That is what the economic logic and research suggests.
Q: Euclid Tsakalotos has replaced finance minister Yanis Varoufakis, who resigned this week. What might we expect of Tsakalotos?
Mody: The Greek problem remains regardless of who the finance minister is. I doubt that the essential position will change with a new finance minister.
