Greeks inch toward surrender
The Greek situation rumbles on without resolution after a weekend that saw more posturing, but no deal between Athens and the Brussels group. The message from European Union leaders is that Greece must bow, and while Prime Minister Alexis Tsipras remains defiant, it was noteworthy that his interior minister indicated a willingness to cede ground on Syriza’s anti-austerity programme. As this messy endgame plays out, the question facing jaded investors is whether a denouement is days away, or can the current farce be extended deep into the summer.
Such a calculation boils down to when the Greek government runs out of money. It has cut spending, built up arrears and even tapped the petty cash of its foreign embassies. Four months ago, Greece ran a primary surplus, but the effect of its latest bailout negotiations with the EU and the International Monetary Fund has caused economic activity to shrivel. Tax revenue has slumped and initial data indicates that in 2015 Greece will run a primary deficit of 1.5% of GDP. Such a situation would not matter for a “normal” economy able to access debt markets, but for a pariah such as Greece, it could prove fatal. So long as Greece ran a surplus, Tsipras could plausibly renege on debt repayments yet still meet the government payroll and make pension payments. Without such a surplus, Tsipras cannot satisfy creditors and is set to incur the wrath of the general public.
Greece’s next IMF repayment, EUR 300 mln, is due on June 5 with three others due in June. Whether these are paid on the nail is not really the issue. Missing the due date is a little like being late with a gas bill, resulting in a standard reminder letter being sent. When dealing with the IMF delinquents get a minimum one month grace period. They also have the option to roll up individual payments into one lump sum at the end of the month. An official default does not occur until the IMF managing director notifies the executive board, which could take as long as six weeks after a missed payment.
This matters for Athens as IMF repayments can be deferred until after government workers must next be paid at the end of June. Failure to meet the payroll or settle pension payments risks triggering a revolt that could severely damage Syriza’s political support.
Looking beyond immediate hand-to-mouth survival, one touted option for Athens is to print IOUs which would effectively be a parallel Greek currency. The problem is that this fundamentally breaches the stipulation that the euro must be the only official tender in the single currency area. As such, any such issuance could not be used as a substitute for euro currency debts, including Greek bank deposits. Hence, the new “currency” would quickly lose value; inflation would soar and those getting paid in IOUs would be left even worse off.
To be sure, there have been cases of governments, notably California in 2009, using IOUs to manage through a liquidity crisis. The difference between Greece and California was that the latter was issuing notes in dollars, while the former would be offering up a denomination which had no basis in EU law.
In the event that Greece did miss an IMF repayment, consequences would still follow for both the Greek government and the rest of the eurozone. Athens would need to quickly impose capital controls in order to halt an already rapid deposit flight from Greek banks turning into a torrent. The rest of the eurozone would see market ructions, with bonds in peripheral economies such as Portugal especially impacted. Still, while the eurozone could live with the volatility, especially with the European Central Bank ready to buy bonds, the Greek government could be broken by the failure to meet its domestic payment obligations.
If such a chain of events did unfold it would mean “the inevitable” was merely being delayed. If Athens pays its civil servants and pensions at the end of June by withholding IMF payments, a EUR 3.2 bln debt repayment to the ECB is due on July 20th. Any default to the ECB would cut off Greek banks from EUR 114 bln in ECB liquidity triggering a banking sector collapse.
Syriza is under siege from all sides. Finance Minister Yanis Varoufakis has failed because by portraying Greece as a country with nothing to lose, economic activity slumped and the primary surplus vanished. Instead of capitalising on last year’s growth momentum at a time when the rest of the eurozone has picked up, Varoufakis has instead remonstrated.
And having blown that lifeline, the government has no credible alternative but to bow to Europe’s demands. Grexit would now be political suicide for the Syriza-led government.