After the Greek elections, gathering storm clouds over Athens

It is difficult to see how Greece’s newly elected government could have gotten off to a worse start. In the short space of four days after being elected, it has managed to antagonize its official creditors on whom Greece still remains so highly dependent. It has also managed to roil Greece’s financial markets as well as to incur harsh warnings from its rating agencies. All of this is highly suggestive of Greece rapidly moving toward a full-blown financial crisis that could force Greece out of the euro well before year-end.

Evidently Alexis Tsipras, Greece’s new and inexperienced prime minister, does not believe that one should not bite the hand that feeds it. As his first official act as prime minister, he chose to lay a wreath at the tomb of 200 communist partisans who were murdered by the Nazis during World War II. Needless to say, this provocative act did not go unnoticed in Berlin, the capital city of Greece’s principal paymaster.

{mosads}Nor did Tsipras’s first substantive foreign policy action play well in Berlin and Brussels. In a seeming act of defiance, the new Greek government has made it clear that it does not share the European Union’s Russian sanctions policy. Indeed, in an act that is widely being interpreted as the new Greek government cozying up to the Russians, Greece has intimated that it will veto further European sanctions on Russia.

If Tsipras’s foreign policy actions are likely to cause frictions with Greece’s official creditors, his febrile actions in the area of economic policy are certain to do so. Firstly, he chose as his coalition partner the extreme-right Independent Greeks, whose only point in common with Tsipras’s far-left Syriza party is an anti-austerity stance. Secondly, he chose as his minister of finance Yanis Varoufakis, a self-avowed “Marxist-libertarian” who is not known for restraint in his hostility to Greece’s bailout program.

Thirdly, and most importantly, he has reiterated his intention to reverse the austerity policy imposed on Greece and he has chosen to roll back key reforms requested by the much-reviled troika. Among the measures that he has already announced are the scrapping of hospital and prescription fees, a 13th month pension for low-income pensioners, reinstating sacked public-sector employees, halting the privatization program, raising the minimum wage and reinstalling collective bargaining.

Not surprisingly, markets have reacted with dismay to the clearest of signs that the new Greek government is not about to make the major U-turn in policies that is required for Greece to continue enjoying European Central Bank and International Monetary Fund backing. Over the past three days, Greek bank stocks lost more than 25 percent of their value, while three-year Greek government borrowing costs have now increased to over 17 percent. More ominously still, there are now clear signs of an incipient bank run. Over the past month, the Greek banking system is reported to have lost 11 billion euros in deposits, with the pace of deposit withdrawal picking up over the past week.

The only rational explanation for Tsipras’s actions to date is that he truly believes that Greece can act with impunity and that its official creditors will continue to finance it. Sadly, this is all too likely to prove to be a gross miscalculation that will cost both Greece and the rest of the eurozone dearly. It overlooks the fact that German Chancellor Angela Merkel risks the wrath of her electorate if Germany is seen to be caving into an unreformed Greece’s extravagant demands. It also overlooks the fact that Merkel will be highly reluctant to make generous concessions to Greece, as she knows full well that she would then be forced to concede similar concessions to the rest of the eurozone’s peripheral countries.

Judging by the acute unease of markets and of Greek bank depositors, Greece does not have the luxury of time on its side. Indeed, if Greece wishes to stay in the euro, its government not only needs to do a major U-turn, but it needs to do so before a full-scale bank run gets underway. Hopefully, the Greek government’s initial missteps will soon be corrected. However, I am not holding my breath.

Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

Tags Alexis Tsipras Austerity ECB EU European Central Bank European sovereign debt crisis European Union Germany Greece IMF International Monetary Fund Syriza Party

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