The deadline for a decision on Greece's future — in or out of the euro — seems to keep slipping. A few weeks ago, June 30 was seen as Greece's last chance to come to terms with its European creditors. Then the July 5 referendum was seen as the point of decision. Now European leaders are warning Greece's leaders that they need to make a decision by Sunday, or risk exit.
But while the delayed decision hasn't triggered a full-blown financial crisis, the uncertainty and legal restrictions of the past two weeks are imposing a terrible toll on ordinary Greek people. The Greek economy is rapidly becoming cash-only, and with far too little cash to go around, the economy is grinding to a halt.
Greek bank deposits are losing value
While Greek and European leaders negotiate, the Greek economy is slowly being destroyed by the uncertainty — and by financial controls imposed by the Greek government.
The basic problem is this: Everyone knows that the money deposited in Greek banks may soon be converted from valuable euros to much less valuable drachmas. Greek people aren't stupid, so if they had the option they would take all of their money out of the banks.
But Greek banks don't have enough money to pay every depositor. So to prevent bank runs, the Greek government has placed strict limits on how much money people can withdraw. Cash ATM withdrawals are limited to €60 per day, and there are strict limits on electronic transfers out of Greece.
As a result, there are already two de facto currencies in Greece. Paper euros in people's pockets have the same value that euros have everywhere else. But electronic euros saved in Greek banks are worth less — probably a lot less — than euros everywhere else. They've become drachmas in all but name. And anyone who has a choice in the matter doesn't want to accept these soon-to-be-depreciated electronic euros.
Uncertainty is crippling commerce in Greece
Reuters has an interesting story illustrating the kind of problems this creates. It focused on the predicament facing the Greek olive oil industry. Olive oil producers don't want to take electronic payments for their olive oil, because they know a tank of olive oil is more likely to hold its value over the next few weeks. So they're telling customers that they'll only sell if they're paid in cash.
But many customers don't have the cash they need. "A single olive oil cargo costs about 100,000 euros, so you can imagine we don't have such sums in cash," an olive oil dealer told Reuters. So the olive oil industry is gradually freezing up, with farmers building up reserves of olive oil they won't be able to sell until after the financial crisis is resolved, one way or the other.
A key point here is that either a new EU-Greek deal or a formal exit from the eurozone will make things easier for the olive oil industry. Obviously, if Greeks get a deal, the danger of devaluation will go away and olive oil producers will start accepting electronic euros again. But things will also get better after euros are converted to drachmas.
A big problem right now is that no one knows how likely devaluation is or how much drachmas will be worth. Once the switch actually happens, drachmas will start trading as a separate currency, and the market will help set an exchange rate. At that point, olive oil producers can mark up their prices to compensate for the lower value of drachmas, and enjoy some certainty that they'll be able to get their money's worth.
You might think that olive oil producers could sidestep this issue by having customers sign contracts promising to pay in nondepreciated euros in the future. The problem is that if Greece does exit the eurozone, everyone expects the Greek legislature to pass legislation converting all debts in Greece from euros to the new currency. So selling olive oil in exchange for a promise of future euros is no better than selling olive oil for euros in Greek banks.
Capital controls are strangling Greek imports
Things are even more challenging for Greeks who rely on imports from abroad. The New York Times reports, "Cargo containers of food, some medicines and other daily necessities are beginning to pile up on the docks at Piraeus, the international seaport outside Athens."
Limits on international payments make it difficult for Greek customers to pay their foreign suppliers. And foreign companies aren't willing to extend credit to Greek companies because they know that economic turmoil might push many of them into bankruptcy in the coming weeks.
According to the Times, "some importers at the port had boarded planes with up to 60,000 euros, or about $66,000, in cash for day trips to Britain, Germany or other European countries to pay their suppliers." But it's not practical for every institution that buys things overseas to do this, so international trade is drying up.
This is a particularly severe problem for those with serious medical conditions. Most of the medicines Greek people take are manufactured abroad, and hospitals and pharmacies in Greece are starting to run short.
This kind of problem is only going to get worse in the coming days. Greek people knew financial problems were likely, so many stocked up on supplies in the weeks before capital controls were imposed on June 29. But those supplies are running out. The longer the Greek economy is frozen by uncertainty, the more people will suffer.