The Greek debt problem

by Véronique Queffélec on avril 20, 2015


ECB bankers admit the current lack of visibility in the negotiation process. Even though the European Commission, the ECB and the IMF are doing their best to compromise, they will not accept to lend money and bailout Greece one more time if they do not trust the Greek government ability to implement structural reforms. They will lend money if and only if a sustainable agreement is found and the Greek government shows evidence of the implementation of the reforms agreed. Thus, an “accidental Grexit” seems more and more likely to occur, even though all parties hope that a compromise will be found before May 15. On the ECB/ Brussels side, the concern is much more about the precedent a Grexit would set rather than getting back the money they lend, since most of it has been provisioned. Key points to understand the current situation

- There has been a lot of amateurism on the Greek side and false rumors on both.  The Greek Finance Minister Varoufakis’ use of social media to conduct diplomacy and the lack of experience of the overall team are good examples of this. On the other side, many specialists fed rumors of Greece running out of cash by early March 2015.

- The government is now delaying payments to the private sector and even if Greece is not running out of cash yet, it does not have sufficient cash to run properly.

- There is a need to find an agreement by 15 May 2015: date of the government running out of Cash according to the Greek Accounting Office. There is still a lot to be done and the Greek government has less than two weeks of grace left before proposing sustainable solutions at the negotiating table.

Very recent news

- IMF: The Greek government asked quietly the IMF whether it could delay the 1 bn EUR loan payment due next month. The IMF rejected the proposal. Indeed, delaying payments to the IMF would be unprecedented for a Eurozone member. That is why the Greece’s 10-year bond surged to 12.4% on Thursday, a 70 basis point increase. In reaction, FTSE Eurofirst dropped by 0.9% yesterday, the worst drop in three weeks. Last Thursday, Christine Lagarde and its staff said at the IMF’s spring meetings that the IMF will refuse to reschedule the debt until a sustainable agreement has been found. Furthermore, the IMF Chief Economist, O. Blanchard, underlined the increasing probability of Greek Exit.

- Markit’s chief economist, Chris Williamson, explained on Thursday, April 16: “The cost of insuring against a default by the Greek government has spiked sharply higher as worries about the ability to meet debt repayments have intensified. Credit default swap prices, which provide investors with protection to insure against debt default, have surged higher. The CDS market is now implying a 77% probability of default by the Greek government in the next five years, according to Markit data.”

Answers to some current hot questions

§ What is going to happen with the Greek debt problem? Greek politicians have taken a hard line. What is the true likely outcome if it continues?

It is obviously very difficult to have a direct answer to these questions. However, it is undeniable that the probability of a default and Greece leaving the Eurozone is in the head of the “Troika” technocrats, especially the idea of an “accidental Grexit”. The negotiation has been going in circles for a few weeks. Greek Prime Minister A. Tsipras proposals are not going enough in the direction the ECB and the European Commission requires.

First of all, the ineptitude of Tsipras team has been the main problem since the new government has been elected.  Off record, the European Commission and Central Bankers have been complaining about the fact Tsipras’ team does not have the skills to lead such reforms. Their lack of experience has being slowing the negotiation process. This is a main difference with the former government. Indeed, even though some or most of them were corrupted, they were skilled and had some experience to efficiently implement some structural reforms.

Secondly, should A. Tsipras be willing to find an agreement, he will have to explain to the Greek citizens that he was actually elected for almost nothing. The EU has not changed its stance and will not allow some major reforms Tsipras had announced during its campaign to happen. It seems quite unlikely that the Greek Prime Minister is willing to do so for two main reasons: it does not believe in what the EC and the ECB are offering and it requires immense courage.

Thirdly, an “accidental Grexit” is more and more likely to happen. There has been increasing pressure on the Greek government. Because both parties cannot find an agreement, the default may occur simply because of a lack of time to compromise. This idea has not been on the table for long but seems to be in the head of all technocrats at the moment.

The negotiation process is very foggy at the moment. ECB bankers’ main concern at the moment is an “accidental Grexit”, which would not help Greece since a devaluation of their currency would increase the debt burden and would not boost exports since Greece’s economy does not rely on the latter. Furthermore, the real concern is that Greece does need the ECB and the IMF as lenders of last resort in the near future and it is very hard to assess how they would be able to do so if they default.

§ There is about 7 billion Euros of debt owed from Greece to the ECB in July and August. How is this likely to get refinanced? Does the ECB/Brussels have a “plan B” if the hardline continues?

The solvency of Greece is not only about finding a compromise but also about the ability of the government to implement the reforms it would agree to. The current team does not seem to be able to do it but some former Greek technocrats be called back by Tsipras in a few months. The Greek government will certainly understand at some point that they cannot solve the crisis on their own and that political willingness is not sufficient.

Some reliable sources confirmed to us that the 7 billion euros of debt as well as most of the money lent to Greece has been provisioned. Thus, there would not be any major consequences for the Eurozone. Member states may still have to cover a slight portion of it, but it would not make the EU suffer. Thus, there is no real need for a “plan B”; the worst has been anticipated.

However, the real risk for the EU is the precedent a Grexit would set. The ECB and the European Commission have been trying as hard as possible to find a compromise for two reasons. Firstly, a default would harm most Greek citizens and such a situation is hard to accept for EU politician and economists as human beings. Secondly, it would create a precedent, which means that some other countries would become vulnerable. If the Grexit occurs, some countries with high debt level and negative Balance of Payments such as Spain and France could follow in a few years.

What is next?

If the pace of negotiation does not change, it seems very unlikely that they will find an agreement by April 24th. The highest probability of an agreement would be May 11th. It is hard to believe that the Greek officials are actually not working on finding an agreement even though there is apparently no significant change in their behavior at the moment.

More importantly, one may keep in mind that the policy and requirements the IMF and the ECB want to impose on Greece have not changed and that according to the Greek people who voted for A.Tsipras, it is a method that failed under the previous government. Thus, it is not the right path according to the current government. As of today, delays in debt payments seem more likely than reaching a sustainable agreement.