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Greece: Hang Down Your Head, Tom Dooley

Antonis Samaras has toured Europe. He was nicely received and heard surprisingly friendly words. The man whom Brussels last year hated for his obstructionist policies was treated with respect and honor, much to the surprise of the Grexit league of economists and politicians.

What has happened? One can hardly fail when assuming that it was once again cunning Mrs. Merkel who pulled the strings. She must have heard and read more Greek scenarios than anyone can digest without throroughly disliking the subject and its stakeholders, one of the worst ones being Mr. Samaras.

In her methodical way she must have come to the conclusion that Greece is indeed a hopeless case which offers only two alternatives: bankruptcy with the euro or bankruptcy without the euro.

The crac with the euro is the more interesting case. It resembles the case of governments defaulting under the former gold standard. Staying in the eurozone means accepting the euro as the gold standard which neither the government nor the central bank can influence. The government defaulting on its debt has empty coffers and will not be able to pay bills and salaries beyond the trickle of incoming tax revenues.

Millions of state employees and beneficiaries will at best be paid a fraction of their emoluments. Bills owed by the government and its agencies will be paid with long delays, if at all. In addition to the all pervasive credit crunch the economy will be cash strapped, resulting in deflation, unemployment and poverty. Essential services such as health care, schools and electricity will no longer be guaranteed. The armed forces will have to send conscripts home for lack of means to support them.

An ugly scenario but the only one which allows the Eurozone to keep Greece in the euro economy. In order to be saved, Greece must first default. All plans currently discussed in Brussels and European capitals are focused on Greece's economy after the default.

Mrs. Merkel has understood, and succeeded in convincing her partner governments, that there is no way any more to save the Hellenes without bankruptcy. The mountain of debts is too high, rising too quickly, and there is not enough will and strength in Mr. Samaras' shaky government to do more than dressing the window.

Since this decision had to be taken after months of useless discussions and billions sunk into Greece's prolonged agony, there is no need now to be ugly to Mr. Samaras. On the contrary, he is being treated like an honored guest, a true statesman. Nice words, praise and sympathy but no money. No more money to be given before the default.

The dirty work of saying no to Greece will be done by the commission of the troika (EU, ECB and IWF) checking on Greece's progress in September or October. After that it is of little relevance if the default will be announced by the current government or, following elections, by a coalition of the leftist parties headed by Mr.Tsipras of the SYRIZA party.

Certainly, the eurozone governments will help Greece to overcome the worst of the crisis following the bankruptcy. Healthcare, schools and public utilities will receive support. For the bloated staff of state agencies, however, prospects are dire. The economy which has already shrunk by a quarter since the crisis began, will contract another 10-15 percent before the bottom is reached and the level of competitivity reestablished which existed before the country joined the euro community.

With production costs and the standard of living reduced to about 60 percent of pre-crisis levels, Greece should again be able to attract investments and expand its exports. Once the world has understood that the hellenic economy is stabilizing with no more defaults and drachmas in the offing, investors will look for privatization bargains and expanding business. Greece could become a gateway to the Eurozone. But Greek governments will not obtain credit. The losses suffered by international and national creditors will ensure that Greek bonds will not rise above junk status for a long time to come. This means Greece will remain cut off from the financial markets und thus be unable to incur new debts, A blessing in disguise.

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—— Ihsan al-Tawil