Greece teeters on the brink

The cri­sis could spin out of con­trol if the debt stand­off is not re­solved

Los Angeles Times - - THE WORLD - By Alexan­dra Zavis alexan­dra.zavis@latimes.com Twit­ter: @alexza­vis

Time is run­ning out for Greece to reach a com­pro­mise with its cred­i­tors to get more money be­fore risk­ing a de­fault that could plunge the 19-na­tion euro cur­rency bloc and global mar­kets into cri­sis.

Greece’s bailout pack­age ex­pires on June 30, and with­out the re­lease of ad­di­tional funds, of­fi­cials say, the coun­try won’t be able to make a $1.8-bil­lion debt pay­ment owed to the In­ter­na­tional Mon­e­tary Fund this month.

Ne­go­tia­tors had hoped to have an agree­ment to present to Eu­ro­zone fi­nance min­is­ters meet­ing Thurs­day that would keep money flow­ing to Greece’s cash­strapped econ­omy. But the talks broke down Sun­day, with Greece and its Euro­pean part­ners trad­ing blame for the im­passe.

Euro­pean of­fi­cials led by Ger­many were de­mand­ing that Greece come with new pro­pos­als for eco­nomic re­forms Thurs­day, some­thing the coun­try said it was not pre­pared to do un­til its cur­rent plan re­ceives se­ri­ous con­sid­er­a­tion. Greek Prime Min­is­ter Alexis Tsipras ac­cused cred­i­tors this week of “pil­lag­ing” his coun­try and said he would wait for them to “ad­here to rea­son.”

Euro­pean of­fi­cials are openly dis­cussing the pos­si­bil­ity that Greece could be forced out of the euro cur­rency, a prospect that un­til re­cently they were not will­ing to en­ter­tain.

On Wed­nes­day, Greece’s own cen­tral bank warned that the coun­try would face a deep re­ces­sion and dra­matic de­cline in in­come lev­els if it failed to reach an agree­ment with cred­i­tors, a course it said would lead ul­ti­mately “to the coun­try’s exit from the euro area and — most likely — from the Euro­pean Union.”

Euro­pean lead­ers could meet as soon as this week­end to dis­cuss con­tin­gency plans. How did Greece get into this mess?

Greece was forced to seek loans from its Euro­pean part­ners when its econ­omy im­ploded in 2009 be­cause it could no longer bor­row on in­ter­na­tional mar­kets af­ter it be­came known that the coun­try had been un­der­stat­ing its deficit for years.

With mar­kets still reel­ing from the col­lapse of Wall Street in 2008, the In­ter­na­tional Mon­e­tary Fund, the Euro­pean Cen­tral Bank and the Euro­pean Com­mis­sion in 2010 is­sued the first of two in­ter­na­tional bailouts for Greece to avert another fi­nan­cial cri­sis.

In ex­change for loans ex­ceed­ing $270 bil­lion at to­day’s ex­change rate, Greece was re­quired to im­pose deep bud­get cuts and steep tax in­creases along with other re­forms aimed at re­duc­ing the gov­ern­ment’s bloated pay­roll, curb­ing tax eva­sion and mak­ing the coun­try an eas­ier place to do busi­ness. How­ever, Greek of­fi­cials and many an­a­lysts con­tend that the painful aus­ter­ity mea­sures have also caused the econ­omy to con­tract by 25% in the last five years.

Tsipras won elec­tion in Jan­uary on prom­ises to scrap the bailout agree­ment un­less Greece was given a sig­nif­i­cant re­duc­tion in its obli­ga­tions and the lat­i­tude to in­vest in jobs in a coun­try with the un­em­ploy­ment rate top­ping 25%. But cred­i­tors feared any bending of the rules would en­cour­age other bailout re­cip­i­ents, such as Por­tu­gal and Ire­land, to de­mand sim­i­lar con­ces­sions.

With Greece on the verge of bank­ruptcy, the gov­ern­ment struck a deal with Euro­pean of­fi­cials in Fe­bru­ary to ex­tend its re­pay­ment pro­gram for four months but have failed to reach agree­ment on the eco­nomic re­forms needed to re­lease $8 bil­lion in re­main­ing bailout funds. What are the main stum­bling blocks?

The two sides have made progress on fis­cal tar­gets, with Greece agree­ing to a grad­ual in­crease in its pri­mary bud­get sur­plus, the amount by which tax rev­enue ex­ceeds spend­ing af­ter debt in­ter­est pay­ments are stripped out. But ma­jor dif­fer­ences re­main over mea­sures needed to achieve the tar­gets.

Tsipras told law­mak­ers from his left­ist Syriza party Tues­day that cred­i­tors were de­mand­ing sweep­ing pen­sion cuts and tax hikes on sen­si­tive items such as medicine and elec­tric­ity. Cred­i­tors say they are open to other ideas but the gov­ern­ment has not come up with pro­pos­als that they be­lieve are cred­i­ble. The Euro­pean Com­mis­sion’s ex­as­per­ated pres­i­dent, Jean-Claude Juncker, said the de­bate would be eas­ier if Greek of­fi­cials did not mis­rep­re­sent cred­i­tors’ pro­pos­als to their peo­ple.

“I am not in fa­vor — and the prime min­is­ter knows that — of in­creas­ing [sales taxes] on medicine and on elec­tric­ity,” he told re­porters. Is there a dan­ger to other economies?

A Greek exit from the Eu­ro­zone would plunge mar­kets into un­cer­tainty about the fu­ture of the shared cur­rency that is a cen­tral part of the EU vi­sion of the con­ti­nent as a uni­fied eco­nomic pow­er­house. But steps have been taken in re­cent years to im­prove the re­gion’s de­fenses against mar­ket tur­moil, and most an­a­lysts aren’t pre­dict­ing a ma­jor ef­fect on the global econ­omy.

Fran­cisco Tor­ralba, a se­nior economist at Morn­ingstar In­vest­ment Man­age­ment, said a so-called Grexit was man­age­able be­cause much of the coun­try’s debt is held by in­sti­tu­tions such as the IMF and Euro­pean Cen­tral Bank, with only a small por­tion in the hands of pri­vate cred­i­tors, most of them with ac­cess to sup­port from the Euro­pean Cen­tral Bank. “I don’t think the mar­kets would have a very strong re­ac­tion to a Grexit,” he said. What hap­pens if a com­pro­mise isn’t reached by the end of June?

Greece won’t be de­clared in de­fault un­til the IMF’s man­ag­ing di­rec­tor, Chris­tine La­garde, is­sues a com­plaint to the ex­ec­u­tive board af­ter an al­low­able grace pe­riod. Of more im­me­di­ate con­cern, an­a­lysts say, is the risk that Greece will miss pay­ments due to the Euro­pean Cen­tral Bank to­tal­ing $7.5 bil­lion in July and Au­gust.

“If they don’t pay the ECB, it be­comes a lot harder for the ECB to con­tinue pro­vid­ing liq­uid­ity to Greek banks,” said Dou­glas El­liott, an eco­nom­ics scholar at the Brook­ings In­sti­tu­tion, a Washington think tank.

With­out con­tin­ued cash in­fu­sions, Greece could even­tu­ally be forced to start print­ing its own money again — most likely the drachma, the do­mes­tic cur­rency it aban­doned 14 years ago — set­ting off a new spi­ral of inf la­tion.

The threat alone could cause a run on Greek banks and a short­age of funds to keep the gov­ern­ment op­er­at­ing, forc­ing the coun­try to im­pose re­stric­tions on cash with­drawals and trans­fers.

That may be what has to hap­pen to give of­fi­cials on both sides the po­lit­i­cal cover they need to reach a com­pro­mise, El­liott said. “I fear we are go­ing to have to have things fall apart be­fore we can pull them to­gether,” he said.

But other an­a­lysts be­lieve ne­go­tia­tors will find a way to bridge their dif­fer­ences, if only enough to keep the talks go­ing.

“I still think that’s the most likely sce­nario,” said Nick Malk­outzis, deputy editor of the Kathimerini English Edi­tion, a Greek daily.

“The prob­lem that we have now is there are so many mov­ing parts to this, it’s be­com­ing very dif­fi­cult to en­sure that they all fall in place at the right time.... It looks like it’s go­ing to be quite an anx­ious few days ahead.”

Louisa Gouliamaki AFP/Getty Im­ages

PROTESTERS IN ATHENS last week take down a ban­ner bear­ing an im­age of Greek Prime Min­is­ter Alexis Tsipras on a Euro­pean Union f lag.

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