At this stage, creditors, euro zone leaders have as much to lose as Greece

Share

In the world of economics and business, money always wins. Greece has none; its international creditors have lots. Greece, therefore, has no choice but to buckle to the creditors' austerity-for-loans demands. But this time around, it is the creditors, and the European government leaders who support them, who will emerge as the main losers in this sorry saga no matter what happens.

If Greece waves goodbye to the euro zone, they will be blamed for rupturing the great European integration project, proving that the euro, in spite of endless protests to the contrary, is not a permanent and ever-expanding construct. If they hammer Greece into submission by forcing it to load up on more bailout loans that it cannot afford to repay, they will be seen as undemocratic bullies.

And if Greece does default on any loans new or old, a near certainty given the dire shape of the Greek economy, the leaders will have to explain how they lost tens of billions, perhaps hundreds of billions, of taxpayers' money.

The leaders of Greece's creditors – the European Union, the European Central Bank and the International Monetary Fund – must be in a state of shock. So too, the prime ministers and presidents of the big euro zone countries that are main backers of the creditors and sponsors of the twin bailouts soaked up by Greece since 2010 when it found itself shut out of the debt markets.

Crises are nothing new and all of them are like basketball games. The game is determined in the last five minutes and the creditors and euro zone leaders had assumed the Greek negotiations would follow the same playbook. There would be a series of attacks and counterattacks. When all hope seemed lost as the clock ticked down, a compromise would suddenly emerge and the game would end. Cue photo op, with cheesy grins.

A week ago, a compromise seemed imminent after five months of go-nowhere negotiations between Greece and its would-be rescuers. Investors said so and investors tend to be more right than wrong. The Athens bourse soared, Greek bank shares rose and the euro climbed.

Then it all fell apart. Greek Prime Minister Alexis Tsipras refused to accept the new austerity-laden bailout terms that, it argued convincingly, would doom Greece to permanent recession. The creditors responded by applying even more pressure on Greece by refusing to extend its current bailout program beyond June 30.

On Sunday, the ECB ramped up the pressure by freezing the level of emergency loans it had been supplying since February to the Greek banks. To prevent a crippling run on bank deposits, the Greek government had no choice but to close the banks on Monday. The Greek economy is now on the verge of chaos.

The game is not quite over, of course. But at this stage, it appears the creditors and the euro zone leaders have as much, or more to lose, than Greece. Greece will leave the euro zone and reprint the drachma unless it gets bailout terms to its liking. It would go through hell for a while, to be sure, but equipped with its own currency, it could devalue its way to some semblance of prosperity, as it has done on and off for two centuries. Or the creditors will bend and offer Greece a form of austerity-lite, and a promise of debt relief if it fulfills the conditions attached to the new loans.

The creditors and euro zone leaders cannot emerge unscathed. Take ECB president Mario Draghi. In 2012, at the height of the European crisis and recession, he promised to "do whatever it takes" to keep the euro zone intact and assured everyone that the euro was "irreversible." Greece's exit from the euro zone (known as Grexit) would make a lie of his pronouncements. Various economists say Greece's chances of sticking with the euro are 50-50.

German Chancellor Angela Merkel, is a champion of the European integration project that has, so far, been a godsend to the German economy. If Greece bolts, she will have overseen the dismantling of the southeastern fringe of the euro zone, and who knows what other economic weaklings – Portugal, Spain, Italy – could follow Greece out the door. If Greece is flooded with new loans and stays, she will earn the wrath of her voters and taxpayers, about half of whom say they want Greece to get lost. She could also lose the support of her able Finance Minister, Wolfgang Schaeuble, whose patience with Greece wore thin months ago.

Spanish Prime Minister Mariano Rajoy is another leader in a lose-lose situation. If Greece gets an austerity-lite package, it will embolden Podemos, the upstart anti-austerity party that is leading the polls as Spain gears up for its December general election. Ditto if Greece leaves. That would allow Podemos and Europe's other anti-establishment parties, from Italy's Five Star Movement to France's National Front, to argue that Greece and its people were cruelly punished by the creditors' harsh austerity programs, to the point that Greece had no choice but to scrap the euro and go it alone. They would declare the European project dead and depict Ms. Merkel, Mr. Draghi and IMF boss Christine Lagarde as agents of destruction.

On Sunday, just before the Greek government announced the banks would not open on Monday, Greek Finance Minister Yanis Varoufakis called the Greek crisis "a dark hour for Europe." He's right, no matter what happens.