Katie Allen Monday 15 June 2015
Athens and EU finance ministers remain at loggerheads but if an agreement is not reached by this weekend there are many long-term consequences
Why is this a crunch week for Greece?
The Athens government has been in debt talks with its international creditors for months in a bid to get them to release a last chunk of held-up bailout funds and avert bankruptcy. It needs the money to meet debt repayments and without it there is a fear that Greece will end up defaulting, which could precipitate its exit from the Eurozone.
Talks at the weekend ended in a stalemate. Eurozone finance ministers meet on Thursday, possibly the last chance to unlock badly needed rescue funds for Greece before it has to repay €1.6bn (£1.2bn) to the International Monetary Fund at the end of June.
Dramatic day sees traders are spooked by collapse of negotiations last night, PM Alexis Tsipras vows not to cave in, and German media reports of an emergency ultimatum.
What are the debt talks?
After bailouts in 2010 and 2012, Greece owes money to the so-called Brussels Group, made up of the IMF, the European commission and European Central Bank (ECB). A further €7.2bn in bailout money is still to be paid out to Greece by the trio of creditors. The creditors, also known as the troika, want to see more reforms in Greece in return for releasing the last lump of rescue funds.
Greece’s government, led by Alexis Tsipras, the prime minister, contends that austerity measures demanded by creditors are too harsh and that some of its huge debts need writing off or shifting back for much later repayment if the country is ever to get back on its feet. Tsipras came to power on an anti-austerity ticket in January and is refusing to accept new spending cuts and tax rises to achieve the budget surpluses demanded by Greece’s lenders.
Tsipras has indicated he would accept compromises on the lenders’ austerity demands in return for debt relief – the writing off or rescheduling of some of Greece’s debt. But debt relief, and the prospect of never recovering money owed, is staunchly opposed by Germany, the biggest contributor to Greece’s €240bn bailouts.
Where have the two sides got to?
Last-ditch talks on Sunday collapsed in acrimony after 45 minutes. European Union officials dismissed Greece’s latest reform package as incomplete and said there was still a €2bn gap between Athens and the trio of lenders in terms of yearly permanent budget savings.
Greece continues to insist on softer terms for the rescue funds. Tsipras implied on Monday that he would continue to resist demands to raise taxes and cut pensions. “One can only see a political purposefulness in the insistence of creditors on new cuts in pensions after five years of looting under the bailouts,” he said in a statement to the Greek newspaper Ton Syntakton.
“We will await patiently until the institutions accede to realism,” he said. “We do not have the right to bury European democracy at the place where it was born.”
Collapse in talks with creditors heightens default fears as Greek PM Alexis Tsipras attacks ‘five years of looting’ under bailouts
After the breakdown of Sunday’s talks, the IMF sought to bring the parties closer together, with its chief economist, Olivier Blanchard, making suggestions for both sides. He said Brussels should be prepared to delay more of Greece’s debt repayments, accept only limited reforms and cut the interest applied to debt-relief loans, while Tsipras should offer further pension reforms and accept that some VAT exemptions must be dropped.
What happens this week?
On Wednesday, the ECB’s governing council meets and will discuss whether to extend emergency liquidity assistance (ELA) for Greece. The ECB has been drip-feeding this support to Greek banks as they struggle with dwindling deposits because worried Greek savers are pulling their money out of accounts to keep at home or move overseas.
However, as the name implies, this was never intended to be a long-term measure to keep a Eurozone country afloat and the ECB has come under pressure to pull the plug. On Thursday, Eurozone finance ministers gather in Luxembourg, and the cash-for-reform talks will resume.
Headlines say time is running out. Is it?
Over five months of fruitless talks, phrases like “last-ditch” and “crunch time” have been used again and again. But a look at Greece’s debt repayment schedule suggest things really are coming to a head now.
Greece has a heavy calendar of debt repayments, as the chart below shows (note that the June payments to the IMF are now due in one lump sum of €1.6bn on 30 June, after Greece was allowed to bundle them together). Greece also needs funds for domestic spending obligations such as paying public-sector workers and pensions. Without the held-up bailout money Greece will sooner or later miss a debt repayment – technically defaulting.
Greek debt calendar
As Michael Hewson, chief market analyst at the broker CMC Markets UK, says:
The standoff between Greece and its creditors over pensions is part of a much wider problem: the conflicts between economics, politics, a dependent society, and inefficient accounting
The fact is, unless some significant concessions are made on either side, a default is now more or less inevitable, and even if a plan were agreed that was agreeable to the creditors, it is unlikely that the Greek government would be able to get it through their parliament.
Given that Germany won’t countenance anything like debt relief at this point, we are likely set to see a continuation of this game of political cat and mouse through this week’s Euro group finance ministers’ meeting on Thursday, and beyond to the end of the month.
Hewson and other analysts say it is now only a matter of time before capital controls are introduced in Greece, whereby limits are placed on what savers can withdraw from banks.
Views vary over whether Greece can avoid a default and eventual exit from the Eurozone, termed the “Grexit”.
The French bank Société Générale said on Monday:
Our economists’ base-case scenario [60% probability] remains that a last-minute deal will be struck, leading to a semi-stable scenario, but most likely not before the EU summit on 25-26 June.
Alastair Winter, chief economist at the broker Daniel Stewart, paints a gloomy picture:
Mr Tsipras had better get ready to blink if he wants to get a single additional euro from Germany or, indeed, any of the other member countries. Of course, he too may have given up on reaching an agreement and is keeping up appearances simply to impress Greek voters. Either way, he is no longer in last-chance saloon but no-chance saloon.
What is happening to Greece’s economy in the meantime?
As talks grind on, Greece’s economy has fallen back into recession. A sharp drop in investment by increasingly nervous businesses and falling imports and exports left GDP down 0.2% in the first quarter after a 0.4% drop in the final months of 2014, according to the latest figures.
Unemployment remains the highest in the Eurozone at more than 25%. Youth unemployment is above 50%.
Greece, EL on this chart, has the highest unemployment rate in the Eurozone and the wider European Union. Photograph: Eurostat April unemployment data
In the financial sector, capital flight continues and Greek bank deposits have slumped to a decade low.
Will Greece really leave the Eurozone?
Greece does not automatically leave the Eurozone if it defaults on its debts.
Some analysts argue all parties will want to avoid Grexit, even in the case of a default, given the long-term damage it could inflict on the euro project.
Jean-Pierre Durante, at Pictet Wealth Management, comments:
Even in the event of default, Grexit should be avoided. It is not in anyone’s interests for Greece to leave the Eurozone. For Greece, it would mean widespread bankruptcies. For the remaining Eurozone members, the fact that a precedent of exit had been established would probably lead to a permanent upwards re-pricing of their sovereign debt. For both sides, it would be a very risky leap into the unknown.
A short-lived default should not therefore lead to Grexit. It would not be the end of the road for Greece, but potentially the precursor to a breakthrough on a longer-term deal.
But others argue Greece would need considerable help recapitalising its banks following a default, given those banks own significant amounts of government bonds and government-guaranteed bonds and they would slump in value after a default.
Greek banks also use their government bonds and government-guaranteed bonds as collateral to raise funds at the ECB but that would no longer be possible after a default, further raising the pressure on Greece’s financial system. The ELA support that has been propping up the system would probably end.
All this raises the risk of Grexit. Without the help of European partners, recapitalising the banks would probably require issuing IOUs or in fact a new currency altogether – in other words Greece leaves the euro.
Traders polled by Reuters on Monday put the chances of Grexit at one in three, higher than just a month ago.
If it leaves, Greece would move to a drastically devalued currency. That could attract tourists and overseas manufacturers keen to take advantage of cheap deals on holidays and labour, respectively. But in the short-term, Grexit would entail capital controls, financial market chaos and high inflation.
What happens to the rest of the Eurozone if Greece leaves?
There are plenty of risks to the Eurozone aside from the damaging symbolism for politicians such as the German leader, Angela Merkel, of presiding over the first departure from the single currency.
Near-term worries focus on volatility in financial markets and damage to the euro currency. A disorderly exit by Greece would probably raise fears about the other Eurozone countries that were worst hit by the financial crisis and the interest rates on their government bonds would rise.
On the other hand, banks around Europe have reduced their exposure to Greece and the ECB has insisted financial buffers are sufficient to prevent contagion to other weak economies in the currency union.
In the longer term, there is the worry that Greece leaving may well prompt other countries to follow, threatening the entire Eurozone project.
Gary Jenkins, chief credit strategist at asset manager LNG Capital, says much would depend on whether Grexit can be turned into a “seminal moment” that brings the remaining Eurozone countries closer together, such as through jointly issued bonds.
Much would depend upon the response of the Eurozone and the ECB in the short term, economic growth (or the lack of) in the medium term and of course the economic performance of Greece relative to the other Eurozone countries in the longer term...
So we could soon find out if the Eurozone/ECB really do have a plan B. One would hope so, after all, as a certain Mr Wilde might have said: to lose one country may be regarded as a misfortune; to lose two looks like carelessness.