The Greek ‘no’

It is too early to be able to predict the repercussions of the results of the referendum in Greece that was held on July 5, but one thing is clear: the people of Greece have decided to place an extraordinary amount of faith in a government that does not appear to have demonstrated an ability to deliver. We hope, for the sake of the people suffering in Greece, that they are right. But we fear they may have been carried away by a mistaken sense of optimism. While both Athens and Brussels share the blame for the current state of affairs, it has to be said that the Greek government has behaved irresponsibly, deceiving its people into believing that the situation has an easier fix than it really does. Prime Minister Alexis Tsipras’s government has quite irresponsibly suggested that the Greek people’s vote would legimitise policy measures envisaging tax cuts and spending increases, forgetting that Greece simply does not have the money to finance such measures. At the same time, it cannot be denied that the Greek people have undergone much suffering in the past five years and if the European powers don’t want to see Greece exiting the Eurozone, their current insistence on the country continuing with harsh austerity measures could prove to be troublesome.

For us in Pakistan, the drama playing out in Europe should be of interest for more than academic reasons. Greece is a case study on the risks the Pakistani financial system is built upon. Like Pakistan, Greece has a corrupt and ineffective tax collection system, populist spending habits, and a tendency to borrow heavily from banks to finance the resulting deficit. Like Greece, Pakistani banks have massive exposure to their government’s debt. Unlike Greece, however, Pakistan thankfully has its own currency which limits the default risk for the banks and their depositors. But how long do we expect that to remain a bulwark against fiscal stupidity? The events in Greece in the coming months may well provide Pakistan with a stark warning of the consequences of believing in budgetary magic.

Published in The Express Tribune, July 8^th,  2015.

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