How the Greece economic crisis could play out over the next few week.
By ZEKE TURNER 25/4/15, 5:50 AM CET Updated 25/4/15, 1:14 PM CET
RIGA —To no one’s surprise, the meeting of eurozone finance ministers here on Friday didn’t produce a miraculous resolution to the Greek crisis.
But the sense of desperation and frustration with Greece is growing. Yanis Varoufakis, the Greek finance minister, was openly attacked in the closed-door session by his counterparts, who accused him of wasting time and refusing to make the commitment to reform needed to unlock a bailout that could save Greece from bankruptcy.
Despite the unusual display of anger, the process still hasn’t completely come off the rails.
“Yesterday, we spoke of an A plan, of ‘the’ plan, because there is no plan B, C, D, or E,” said French Finance Minister Michel Sapin on Saturday morning. “There is only one plan, and that’s Greece in the euro, Greece in Europe.”
But it’s clear that a rescue is still some way off — and that means the populist Syriza government of Prime Minister Alexis Tsipras is still on course to run out of money in the next few weeks.
What happens next is unknown, but the risks are enormous. There is growing confidence in Europe that the monetary union would survive a default and Greece being tossed out of the euro. However, even a supposedly controllable event can have enormous and unpredicted consequences — as the US and world economies found out after Lehman Brothers was allowed to go bankrupt in 2008.
That has spawned a cottage industry of spinning possible scenarios of what the next few weeks might hold, with some analysts coming up with more than two dozen variations. POLITICO boils that down to a few of the likeliest outcomes.
Default, but stay in the eurozone
The big issue is that Greece owes €323 billion. That comes to about 175 percent of GDP, and almost nobody thinks that Greece and its limping economy have any realistic prospect of paying that back. A lot of people are going to feel an awful lot of pain before the crisis is done.
Stopping payments means a default. But just how that would work is fairly tricky.
Who would Greece default on? Its already furious citizens, by missing the €1.7 billion the government pays out every month in salaries and benefits? The International Monetary Fund, by missing any number of big loan payments due in the coming months? Or maybe the European Central Bank, owed €20 billion for helping out in past rescues?
Greek citizens would feel the shock, but so would people across Europe. Germany is owed €56 billion by Greece, France €42 billion. The evaporation of that kind of money would be a blow to those countries, where growth is lackluster at best.
No developed country has ever defaulted on an IMF loan. Greece owes a total of €32 billion and refusing to repay that would make Greece one of the worst credit risks in the history of modern banking. Mario Draghi, the ECB president, has called the situation “uncharted waters.”
According to the IMF’s terms, the Fund won’t declare a default until one month after a payment due date. However, as soon as it becomes clear that the government is out of money, Greek account holders will likely rush to pull their cash from banks. Before the IMF declares a default, the ECB could deem Greece insolvent. That could mean an end to Emergency Liquidity Assistance, currently being offered by the Greek central bank to keep the financial system afloat.
Default doesn’t have to mean ejection from the eurozone — at least that’s one theory.
In an interview in Athens last week, economist George Bitros of the Athens University of Economics and Business, suggested that there isn’t any reason why Greece couldn’t default and keep using the euro. Since the monetary union is a political project, politicians and bankers could find a way to make it happen. He’s right, technically speaking. As typically tight-lipped ECB Vice-President Vítor Constâncio said in the European Parliament, “legislation does not allow that a country that has a default can be expelled from the euro.”
Greece, that is, would have to leave of its own accord.
Default, and exit the eurozone
Default could also get Greece pushed out of the euro — a result that nobody says they want, not Tsipras, not Greek voters, and not the other members of the eurozone.
The drachma would quickly depreciate, and Greek businesses having to buy parts or products from abroad would face bankruptcy, as would any people or businesses holding foreign loans. Inflation would likely soar.
Although it’s not an outcome anyone wants, Gabriel Stein, director of Oxford Economics Assets Management, has argued that it makes economic sense for Greece to leave the euro.
“Greece should have never been a member,” he said. The issue is that theoretically a cheaper drachma should eventually spur an economic revival, but aside from tourism Greece produces little of export value.
Michael Boskin, a professor of economics at Stanford University, has proposed a two-track euro, with fluctuating exchange rates. A new set of rules would determine who pays with euro A and who pays with euro B, allowing for “depreciation without departure,” according to Boskin. Just how that differs from it having its currency again isn’t entirely clear.
Bank of America Merrill Lynch’s Euro Area Watch says the situation isn’t as simple as Greece-in, Greece-out. One gray-area scenario sees the government of Tsipras temporarily issuing IOUs in place of public-sector salaries or pensions. These IOUs would only be useable in Greece. Companies with foreign payments, like energy companies paying for oil and gas, would be squeezed.
But in theory this measure could keep the country running while buying more time for negotiations. It’s unclear if the ECB would deem these IOUs a form of printed money, which is a violation of eurozone rules. In that case, the IOUs would be the first step toward a new drachma.
The finance ministers’ meeting in Riga, as expected, produced nothing.
The next chance is May 11 when the Eurogroup meets again. Any rescue comes with some serious strings attached, as it would have to include a debt restructuring. Those sympathetic to the Greek cause, like Mark Weisbrot, the co-director of the Centre for Economic and Policy Research, see the onus on the institutions to allow for a realistic assessment of just how much Greece can repay — which may be painful for taxpayers elsewhere in the eurozone.
“Whatever anyone might say about the responsibility of prior governments for the initial recession … it was the troika [the ECB, European Commission, and IMF] that turned it into a Great Depression for Greece,” he said. “They really should accept some responsibility for the current situation, instead of simply insisting that the Greek government continue with a failed program.”
from politico.eu http://www.politico.eu/article/spinning-scenarios-for-greece/