Ativo Capital

Rigorous Thinking

Financial and economic commentary reflecting Ativo’s world view:

Continuing Evolution of the Greek Crisis – June 30, 2015

Wednesday, July 1, 2015


The next few developments in the unfolding of the tragedy in Athens are predictable. The Tsipras government is lefty and spastic; its response to a problem will be more controls. There are controls on cross border payments and apparently there are controls on withdrawals from ATMs.

These controls will enable the banks to delay the dates when they can no longer run replenish the Euro notes in the ATMs. But the planes that have brought these notes from Frankfurt to Athens are no longer flying.

Why will anyone accept the limits on their choices that the government proclaims? There are real shortage is of cash–currency notes. The second shortage in Athens is trust.

The government that came to power in January has not delivered on its rhetoric. (And it is not clear that the government has come to understand the source of its problem.)

Three sets of statements can be made about prospective developments. The economy will be increasingly a cash economy. Vendors will be reluctant to accept credit card payments, since the banks are closed, and they cannot get cash from the banks when they deposit their credit card receipts.

The first involves the responses to the shortage of euro notes.   Some buyers of goods and services will pay with IOUs–the sellers of these goods and services will prefer to accept the IOUs rather than stop their sales. But other would-be sellers will choose not to produce because they do not have the confidence that the buyers will eventually make good on their IOUs.

Over the last few years the successive governments of Greece have made commitments to their creditors. They have not fulfilled their commitments. The extension is that at this stage, the trust among Greeks is not especially high, which suggests that the willingness of individuals to accept IOUs will be limited.

The economy will slow as firms and individuals hoard cash–there are likely to be shortages of gasoline (Airplanes that fly to and from the airports in Athens, Thessaloniki, and the Islands will be carrying the fuel for their return departures with them; they will not have the confidence that there will be fuel supplies). Firms that sell durables like automobiles and construction goods will go out of business.

The flow of tourists to Greece will slow because of uncertainty. Will the planes run on time? Will we be able to pay our hotel bill with a Visa card or an American Express card? Will we be able to get cash from an ATM?

Tax collections will decline dramatically. The government sector in Greece accounts for 50 percent of GDP—ball-park. Some of the government payments were financed with money from northern Europe. Most were financed with money collected from taxes–both direct taxes like those on personal and household incomes and indirect taxes like sales taxes, value added taxes, and other indirect taxes.

Greek firms and households will go on “strike” about tax payments. The storekeepers, restaurants, and tourist hotels will seek to collect taxes from their customers, but they will delay payment.

The government in Athens will be increasingly short of cash. Because the government is short of cash, its payments to the hospitals will be delayed. The hospitals will run short of imported medical supplies.

At some stage, it will become increasingly obvious that the only way that the Government of Greece can get the money to pay its bills will be to establish its own independent central bank.

Six to eight weeks??

Devaluations are painful, like some medicines. The task for the international agencies is to develop measures to minimize the pain.