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The economic timebomb which is ticking away at the heart of the European Central Bank has been primed by this week’s election in Greece, in which the socialist Syriza party assumed government.
Today, just hours after the new President Alexis Tsipras assumed office, the chief economics spokesman for the Syriza administration Euclid Tsakalotos has stated to the BBC that it is unrealistic to expect Greece to repay its huge debt in full. “Nobody believes that the Greek debt is sustainable,” he said.
The far-left Syriza, which won Sunday’s general election, wants to renegotiate Greece’s €240bn (£179bn; $270bn) bailout by international lenders, and vehemently opposes austerity, two facets that the electorate in Greece voted for.
One week ago, in the days following the Swiss National Bank’s removal of the 1.20 floor on the EURCHF currency pair which created such tremendous volatility in the markets that many FX brokers were exposed to negative balances, with some previously well capitalized companies not surviving at all, the European Court of Justice ruled that the European Central Bank’s government bond buying program is compatible with EU treaties, which came about as a result of a request by Germany’s Bundesbank to rule on the Outright Monetary Transactions program created in 2012; a pledge to buy unlimited quantities of bonds if a country was struggling to borrow in the financial markets and had signed up to certain reforms.
Following this, with Greece sinking under the burden of national debt which was initially attributed to the ECB having been buying bonds in the open markets as a way of reducing the interest rate that Greece must pay on market borrowings.
This became a very dangerous fiscal practice when the ECB began taking Greek bonds as collateral against loans to entities such as the already struggling Greek banks. In turn, this was a precarious position, as if there is a devaluation of the bonds, the entire lot will all go bust immediately, leaving the ECB with that collateral which is now worth so much less than the loan against it that it will (near, maybe,) wipe out the ECB’s capital.
The figures are rather in dispute, but there are indications that the ECB is exposed to €150-€190 billion of Greek debt, out of the €340 billion total.
The gravity of this was expanded with European Central Bank President Mario Draghi’s announcement late last week that the quantitative easing measures would exceed those previously expected, with an asset buying program which will extend to September 2016, in which 60 billion euros of assets per month will be bought.
EU leaders have warned the new Greek government that it must live up to its commitments to the creditors, and Syriza leader Alexis Tsipras – who was sworn in as prime minister on Monday – is expected to unveil his new cabinet later on Tuesday.
“I haven’t met an economist in their heart of hearts that will tell you that Greece will pay back all of that debt. It can’t be done,” Mr Tsakalotos said. “It’s going to be a very funny and a very dangerous Europe with very strong centrifugal political forces if they signal that after a democratic vote they’re not interested in talking to a new government. It will be a final signal that this is a Europe that can’t incorporate democratic change and it can’t incorporate social change” he stated.
Mr Tsakalotos stressed that it would be “my worst nightmare if the eurozone collapses because Greece falls. And if Greece falls and is removed from the eurozone – the eurozone will collapse. We said from the beginning the eurozone is in danger, the euro is in danger, but it isn’t in danger from Syriza… it is in danger from the very policies of austerity”.
This gives rise to a potential situation whereby if Syriza were to lose in talks with Brussels and Berlin, and the final rupture of Greece from the euro were to take place, investors might well pull their savings from any eurozone country where nationalists are in the ascendant. During the night following the election, the equivalent of £6 billion was withdrawn from Greek banks.