ON Bloomberg’s Charlie Rose programme this week, leading geopolitical analyst, and head of the Eurasia group, Ian Bremmer, stated that the real reason for the Greek referendum was the need for Prime Minister Tsipras to unite his own party, and not so much as a message to creditors.

Bremmer believes the referendum can be regarded as a political success as Tsipras got majority support of 61 per cent for his “no” position, rather than the minority support that Syriza had previously enjoyed on their election, as well as the declared support of the main Opposition parties the following day to negotiate a deal.

One of the reasons, Bremmer argues, for Tsipras’s success was an IMF report “Greece – Preliminary Draft debt sustainability analysis” issued last week Thursday just before the vote. This was loudly publicised by Tsipras and his former finance minister as an about face by the IMF on the issue of austerity.

What it actually said was that in the late summer of last year no further debt relief was necessary due to the decline in interest rates and the restoration of market access. But the change in policies (lower primary surpluses, weak reform effort, abandonment of privatisation), meant that debt dynamics had become unstable. At a minimum a maturity extension was required, along with an injection of new money at similarly very favourable terms — and at maximum “haircuts” on their debt assuming even weaker performance.

While it is certainly possible to argue that the IMF was still being too optimistic, then and now, it is a stretch to argue that they were endorsing the position of the Greek government on economic policy.

Final ultimatum

On the economic front, the referendum has to be regarded as a failure. Greek banks remain closed, and capital controls remain in place. The European Union appears to have lost patience with Greece, and demanded concrete proposals by midnight yesterday (which it apparently received), with a final “ultimatum” deadline of Sunday 12th of July for Greece to accept a new three-year economic programme.

If this deadline is not met, it says it will start preparing for a Greek exit from the Euro, simultaneously working on measures for “humanitarian aid” for Greek citizens.

If the Greek strategy is actually to remain in the Euro, it does not seem to be working well so far. However, European stock markets are off only 15 per cent from their mid-April highs, or a little under 10 per cent since the Greek referendum, suggesting that overall European markets do not yet appear to be overly concerned about Greek contagion.

The problem is that some of Tsipras’s party clearly believe Greece would be better off defaulting on its debts, printing a new drachma with which it could recapitalise what would then be bankrupt banks, and thereby supposedly avoiding the necessity of implementing the further reforms demanded by the troika (it seems pointless to go on using the euphemistic term “institutions”).

If the European Central Bank’s drip feed of bank liquidity ends as expected next week (absent a deal), the first step in this direction would be the issuance of some form of “scrip” by the Greek government circulating alongside the Euro as an alternative currency.

When the government defaults, it won’t be able to borrow, and it has already said no to austerity or “balancing its books”. In the chaotic climate of an ongoing economic collapse the Greek people would be even less likely, or able, to pay their taxes. At that point the most likely alternative would be for the government to start large-scale money printing to finance the inevitable deficits.

However, the government would now have zero economic credibility, and Greece would then become the absolute classic environment for “bad money chasing out good”, as no one would want to hold the new drachmas as a store of value, and would look to get rid of them as soon as possible, hoarding Euros, with the potential to lead to hyperinflation.

Ironically, this is likely to hurt pensioners most, the very people Syriza had said they were trying to protect by not accepting a new deal.

Furthermore, unlike some small countries, where a major devaluation would help exports, Greece is a very closed economy with little in the way of exports besides tourism. While devaluation would undoubtedly help tourism, this would have been offset by the sharp rises in VAT demanded by the troika (assuming these are implemented), and the overall effect of the potential chaos on the industry.

8.6 per cent growth in Panama

All this is in sharp contrast to Panama, which, according to Raul Moreira, economist and deputy Director at the Ministry of Economy and Finance in Panama, speaking last Tuesday at the PSOJ annual economic forum, “Imperatives for Growth: Options and Opportunities”, grew at an 8.6 per cent annual rate over the last five years, making it the most dynamic in the world.

Panama, he advised, building on its logistics prowess, had sought to make itself extremely attractive for multinational companies to set up their headquarters from a tax perspective, including a total exemption of their overseas business operations from taxation, and no taxes on inputs.

They combined extremely business friendly laws with a solid and stable financial system (no taxation of interest income), and the use of the US dollar. He noted that despite the invasion of Panama by the United States, they had kept the US dollar.

At first glance, all this suggests that Greece has no lessons for Jamaica, except as an example of what not to do. And those who believe (including leading US “academic” economists apparently) that a no vote would help Greece — need to remain in their ivory towers.

However, where these academics have a point is that the Greece debacle should also put the IMF (and others) on notice that their neoclassical macroeconomic models, wholly unsurprisingly, do not work very well for poor uncompetitive economies without much in the way of exports other than tourism.

This does not alter the conclusion that an overvalued exchange rate prevents any way out, which Greece is now proving beyond doubt, as a key part of its problem, is the mammoth deflation created by its attempt to achieve competitiveness absent the ability to adjust its exchange rate.

However, Syriza’s business “unfriendliness”, and that of every Greek government before it means there has been no attempt at measures such as a comprehensive tax reform (a flat tax would be ideal as part of a plan to combat evasion) — or privatisation (now stalled) that coupled with debt relief would allow them a way out.

In summary, while Jamaica’s problems are not as bad as those of Greece, there are some issues that “rhyme”, and we need to get more serious about reform. The best way this could be achieved is if the inevitable pain of reform was softened by greater fiscal space through some form of official debt relief.