FYI | Apr 08 2015
By Greg Peel
The bottom line is Greece owes E330bn to its international creditors. There is another E240bn forthcoming in the long running bail-out by the “troika” of the International Monetary Fund, European Central Bank and European Commission, but in order to receive the next tranche of this bail-out, Greece must comply with the troika’s conditions.
Those conditions amount to Greece owing the IMF a payment of E448m on Thursday. On top of that payment, Greece also faces E194m in interest payments to private bondholders on April 17, and an E80m payment to the ECB three days later, and will shortly need to rollover E2.4bn in short-term treasury bills which will inevitably attract a higher interest rate. Already, 15% of Greek bank deposits have left the country.
Greece is on the slippery slope. For weeks the Leftist Greek government, elected on a “no more austerity” platform, has been negotiating heatedly with bail-out lenders. Having established its government with a supposed intention to thumb its nose at Brussels, in February Greece’s finance minister pledged the government would “squeeze blood out of a stone” to meet its obligations. But there is a problem.
Were the government to pay the E448m, there’s nothing left with which to pay public service wages and pensions. This is a strongly left-wing, socialist government. How can Prime Minister Alexis Tsipras look the people who voted for him in the eye and say sorry, you miss out?
It is this dilemma, and the fact Greece owes a total of E9.7bn to the IMF this year, which has fuelled market expectations Greece is set to default. If Greece fails to make the payment to the IMF this week it will fall into arrears, which no developed world nation has ever done since the IMF was established post WWII. While other undeveloped nations have fallen into arrears before, no nation has ever actually defaulted on the IMF.
Were Greece to do so, it would be an historical first.
To date, the troika, strongly supported by Germany who, let’s face it, provides the bulk of bail-out funds from the purses of its own taxpayers, has held its ground against Greece. The Greek government’s attempts to negotiate a deal that involves an easing of austerity constraints while not impacting on bail-out funds – a classic “cake and eat it too” – have met blank faces. It is thus little wonder that tonight, Alexis Tsipras will meet with Vladimir Putin.
Given the Greek government is Far Left, Tsipras and Putin are supposedly ideologically aligned. (As to Putin’s socialist credentials, that’s an argument for another day). Russia is Greece’s biggest trading partner, thanks to Greece’s reliance on Russian gas. Reports from Moscow suggest Putin is prepared to offer Greece a lifeline, in the form of loans and a possible discount on gas imports. In return, Russia would expect to take control of certain Greek assets.
It has not been made clear what those assets are, but suggestions include the Greek gas company DEPA, and stakes in rail operator TrainOSE and the ports of Athens and Thessaloniki.
But whether or not such a deal has merit on a standalone basis, the underlying implication is it would create a bargaining chip for both parties. Greece could veto European Union sanctions on Russia with regard Ukraine, and Russia could lift its own tit-for-tat export bans on Europe for Greece alone, such as on food, thus undermining eurozone solidarity. Both parties could turn to Germany and say “What do you want to do now?”
But as to whether Greece receives a lifeline from Russia or not, the question of default remains.
Analysts at UBS are giving a Greek default on its IMF loan 50% probability. If Greece defaults on the IMF, it “by default” defaults on the ECB and EC as well. Similarly, a default on one privately owned bond implies default on all.
Since the whole Greek issue blew up in 2011, commentators have argued the possible ramifications of a Greek exit from the euro. Presumably a default would imply an accompanying “Grexit” or forced departure, one way or the other. Suggestions of the quantum of world financial market impact have ranged from “catastrophe” to “Greece is too small to make an impact”.
Four years later, the additional argument is that everyone has had plenty of time to protect themselves against the financial fallout.
As to which of these arguments is correct is possibly only something that can be determined with hindsight. The wider picture argument is that were Greece to exit the euro, the eurozone itself would begin to unravel. Such an outcome has also been deemed likely catastrophic, without precedence in history given there has never been such a convoluted concoction of monetary and fiscal alliance before.
The good news, if there is any, is that Greece will not “default” this week. Defaults do not occur with such a bang. Greece would initially have 30 days to make good on its payment before then falling into arrears, which then leads to a protracted period of work-out. The arrears process is why no nation, no matter how war-torn or poverty-stricken, has ever actually defaulted on the IMF.
This is of course, another card the Greek government could play.
Stay tuned.
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