Greeks inch to­ward sur­ren­der

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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