Greece talks did not go well until last week. That changed when the show of international financial diplomacy moved to Washington for the spring meetings of the International Monetary Fund and the World Bank, when it became worse.
The Greeks want to combine the talks on the extension of the current, second, loan programme with the talks on the new third one, asking for temporary bridging finance to get through the summer. While this might sound like a plan, analysts think it is not.
It is hard to predict for sure if Greece will exit the euro zone. However, the clear thing is that it will eventually default. Some
eurozone officials are at least contemplating the possibility of a
Greek default but without Grexit. The complexity is severe, and they may
not have had the time to work it out. But it may be the only way to
avert utter catastrophe.
While Greece absolutely needs to default, as it is hard to see how the country can ever service its debts as agreed, Greece's default would pose an overwhelming economic risk to the eurozone, injuring its geopolitical ambitions and global reputation.
Athens’ long-term debt-servicing capacity is more than doubtful. Full servicing would require huge primary surpluses — that is, surpluses before payment of interest on debt. It would leave Greece trapped in a debt depression for a long time. The scheduled primary surplus for 2016 is 4.5 per cent, which is bordering on the insane. Athens needs to default.
What kind of default is possible?
1) Greece could default on its citizens by failing to pay public-sector wages or
pensions which would be politically suicidal for
the Syriza-led government.
2) Theoretically, it could default on the two loans it received from its EU partners, though it is not due to start repaying the first of those until 2020, and the second in 2023.
3) Defaulting on the remaining private-sector bondholders is also possible but that would not
be a good idea. Greece might need private sector investors later, says the Financial Times.
4) Greece could also default on the IMF and the European Central Bank and it might trigger Grexit. Nobody has ever done that. The IMF is expecting a series of repayments. The ECB wants its money back in the next few months on debt it holds on its books. Defaulting on the IMF and ECB is the only option that would bring genuine financial relief in the short term.
Grexit
However, Athens might not exit the euro, as default is not synonymous with that. There is no EU ruling that says you have to leave the eurozone when you default on your debt and the connection between default and exit is indirect. If a country defaults, its defaulting securities are no longer eligible as IOUs for the country’s banks to tender at ECB money auctions. The same applies to any other debt guaranteed by Greece. The Greek banks hold quite a bit of the latter category, and might find it hard to obtain liquidity if their government falters.
So to default “inside the eurozone” one only needs to devise another
way to keep the banking system afloat.
The talks are not going anywhere, and this is a worrisome sign, making bets on a deal in the summer or later not reassuring. Particularly puzzling is the Greek
negotiating strategy. The Financial Times analyst tends to agree with finance
minister Yanis Varoufakis that
the eurozone’s economic crisis management has been catastrophic. It is fundamentally unsustainable under present parameters. But the most urgent thing to do is to agree on a deal, instead of preaching how flawed the management has been.
Grexit and the option of a default would require military-style preparation: exchange controls, temporary closure of land borders and airports, overnight bank recapitalisation, and logistical planning to convey money from A to B on D-Day. But are the Greek authorities really so smart they can just wait until the day X arrives, and then manage this whole process in real time with no script?
