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What Happens If Greece Can’t Pay Its Debts?

LONDON, United Kingdom. ‘What Happens If Greece Can’t Pay Its Debts?’ By Philip Inman / Guardian (UK)

This time it’s real: Greece has wriggled out of looming national bankruptcy on numerous occasions over the past five years, but now it has just a few weeks left before it must sign a new debt deal with its Eurozone partners and the IMF – or find itself heading for an exit door that leads back to the drachma.

On Friday, after a meeting of Eurozone finance ministers in the Latvian capital Riga, the signs were ominous. Malta’s finance minister Edward Scicluna, said: “I would describe today’s meeting as a complete breakdown in communication with Greece.”

The Dutch finance minister and chair of the 19-member eurogroup, Jeroen Dijsselbloem, warned that it was very hard to consider a new programme for Greece to cover its funding needs beyond June, given the lack of recent progress. Time was running out, he said, again ruling out giving Greece a slice of the €7.2bn (£5.1bn) of previously agreed bailout cash being held back until a series of self-help economic reforms, ranging from a privatisation programme to pension changes, were agreed.

Since January the newly elected radical-left government in Athens has fought for a complete overhaul of a £180bn rescue package that was due to end in February but was extended until June while new terms were discussed.

The last three months have produced a series of meetings characterised by increasing frustration on both sides. Officials in Brussels have become tetchy and irritated at the lack of detail from Athens about planned reforms. A series of speeches by finance minister Yanis Varoufakis, which have been highly critical of “orthodox” and “failed” policies championed by Brussels, has also driven a wedge between them.

Greek disappointment has mounted at the perceived disrespect shown for its democratic independence and the general election vote that shocked Europe, ushering in as it did the Syriza-led government of leftists and Marxists, many opposed to any deal with Brussels. Syriza supporters argue that the election revealed the depth of feeling against austerity and should force the euro elite to consider the failure of past policies.

In the tug-of-war over a deal, recent weeks have seen Brussels gain the upper hand. Even countries that began talks offering Varoufakis a sympathetic ear – the French, Italians and Dutch – have wearied of his lectures on Keynesian economics and how he would have handled the post-2008 banking crash differently. While not as hardline as the Germans, the Finns and the Spanish, all of which have finance ministers who would gladly see the back of Greece, the rest now talk privately of a post-Greece eurozone.

Athens is convinced it can hold out for a fresh deal – one way or another – until at least the end of June. The government of Alexis Tsipras has been using all means possible to make required repayments to its lenders, meet welfare bills and pay wages to civil servants, from sequestering cash from state-owned bodies to delaying paying bills for medical supplies. Officials insist they can lay their hands on enough cash to refinance outstanding loans due in the next two months while honouring welfare payments and public sector salary cheques. During this time a new negotiated settlement can be forged.

On Friday, Varoufakis said: “Greece is willing to make compromises to reach a deal on its debt. We want an agreement and we are willing to make compromises to achieve this. The cost of not having a solution would be huge for all of us, Greece and the eurozone.”

Varoufakis, who described himself as a “bad politician” last week for his need to say what he believed, admitted achieving to a deal was difficult but that “we will have a solution in the end”.

But can Greece make it to the end of June? Time is running out, there are huge doubts about the money available to Varoufakis and willingness on both sides is weaker than at any time in the last four years.

What if the government fails to pay £2bn of public sector wages on 1 May?

This prospect is unlikely after the coalition administration defeated rightwing opposition groups to force through a decree on Friday that now obliges state bodies and local authorities to transfer their cash reserves to the Bank of Greece.

Deputy finance minister Dimitris Mardas said he could find €2.5bn in loans from state enterprises: “I want this to cover any needs that may occur… taking into account the worst-case scenarios and the needs for May.”

On the same day the ministry must repay €200m of interest on a loan from the International Monetary Fund and a further €760m loan repayment is due on 12 May.

The European Central Bank is allowing the Greek central bank to borrow, but only to roll over loans from foreign banks. The ECB is determined that the Greek central bank does not hand ECB cash to the government.

Several big payments from the Greek central bank to private lenders are due in May. Last week the ECB raised the cap on its loan facility to keep Greece alive and talking. However, on Friday ECB president Mario Draghi raised the prospect of changing the amount, warning that the ECB could potentially impose tougher conditions in return for keeping Greek banks afloat. Another €1.5bn of IMF loan repayments is due in June.

What about more drastic measures?

If the cash runs out, Tsipras could pay workers and welfare payments and delay IMF payments. He has already asked for the IMF to accept a delay and been rebuffed. The IMF pointed out during its recent spring conference that any such delays will not be countenanced: it has not happened in 30 years, and prior to that only to the poorest of central African nations.

Without a deal, the opposition will demand fresh elections rather than see Greece crash out of the euro. The Syriza/Anel coalition remains strong, but Tsipras could be forced to go down this route or offer a referendum. Deputy prime minister Yannis Dragasakis said these alternatives are “at the back of our mind, as options to seek a solution, in case of deadlock”.

These routes are strewn with mines ready to explode, in particular, the consistent support for remaining inside the euro area. There are plenty of MPs in Syriza and the populist Anel in favour of monetary independence, but this is a minority view among voters.

What happens when the exchequer runs dry?

A chess player, thinking a few moves ahead, would advise against missing any IMF payments because the lender of last resort to bankrupt nations would be the only institution capable of rescuing Greece if a Brussels deal fails.

If the cash runs out Tsipras will be forced to impose capital controls to prevent a flight of funds out of the Greek banks and into neighbouring countries as ATMs run dry.

Cyprus showed what can happen when capital controls are imposed – and that it solves only one problem. It cannot provide the government with fresh funds. In the case of the Mediterranean island, that came from seizing the savings of bank account holders. Cyprus also turned to the IMF and Russia for loans. Tsipras is due to visit Moscow, at the invitation of Vladimir Putin, on 9 May for the Second World War victory celebrations.

If the Greek government also set in motion printing a new currency, something it is many months from putting in place, euros seized by the state could prove valuable foreign currency. However, before such a drastic move, Greeks could take to the streets. The far-right Golden Dawn party , which came joint third in the January election, has seen its poll ratings jump as the Syriza negotiating position has failed to make headway.

Varoufakis ended Friday saying his ministry was not bluffing when it said Brussels must support an agenda of reform without demands for further spending cuts and a regime of monitoring that he previously likened to waterboarding. German chancellor Angela Merkel also agreed – as usual – that a deal with Greece was the best result. It’s unfortunate for both that negotiators remain so far apart.

The main players and where they stand                                                                                                                                                             

Alexis Tsipras

The Greek prime minister leads a government that fell just short of a majority in January elections after winning 36% of the vote. His Syriza party, which rules with the populist Independent Greeks party, draws strength from its own and supporters’ strong conviction that the country was badly treated by fellow euro members hell bent on making it pay back every cent of every loan. But conviction may not be enough to win the battle. Hardliners such as Panagiotis Lafazanis, the minister for productive recovery, energy and the environment, have cast themselves as enemies of capitalism and are reluctant to agree a deal at any price. Tsipras’s implied threat of a euro exit is undermined by a consistent majority of voters wanting to keep the currency, which may encourage Brussels to call his bluff.

Yanis Varoufakis

The former economics professor, now finance minister, went into Friday’s meeting of eurozone colleagues in Riga repeating his demand that his counterparts admit that their policies towards Greece, Ireland, Portugal and the rest have failed. It is not a message that wins many friends. In Riga he faced a volley of criticism for his repeated expounding of Keynesian economics, with its emphasis on government spending. His opposite numbers find it childish and patronising. They understand Keynesianism, but don’t think it works. Varoufakis admits he is adverse to the compromises familiar to diplomats and politicians, and many think that rather than be responsible for a fudge he would prefer to go down in flames.

Jeroen Dijsselbloem

The Dutch finance minister is a Labour party MP under pressure at home from falling poll ratings. He rushed to Athens soon after Tsipras took office to offer his hand in friendship, only to be told he was part of the eurozone’s failed austerity project. As chair of the eurogroup of 19 finance ministers, he was a potentially powerful ally, but a meeting with Varoufakis was famously short and ended with a press conference during which the new Greek finance chief said: “We respect institutions but don’t plan to cooperate with that committee.” A member of a coalition government led by the right-of-centre WD party, Dijsselbloem is now understood to be light on sympathy for the Syriza government and frustrated at its posturing and a lack of detail on proposed reforms. But he is against a cheap stitch-up to prevent the Greeks dropping out of the euro, fearing it will prove to be the beginning of a break-up of the single currency.

Wolfgang Schäuble

An architect of German reunification, in the 1990s, the veteran Christian Democrat is a venerable eurocrat. That hasn’t stopped him standing in the opposite corner to Varoufakis from the moment Syriza came to power. In recent weeks he has begun to smile much more and appear more relaxed as Varoufakis has upset one euro finance minister after another, consolidating the German position that Greece must stick to the austerity plan. Unlike those at the International Monetary Fund, Schäuble is an advocate of the previous Greek bailouts, which did not so much fix Athens’ debt problems as rescue German and French banks faced with Greek liabilities. He has the support of prime minister Angela Merkel, but she may force him to accept a compromise if one becomes possible.

Christine Lagarde

Like most players in the crisis, the boss of the International Monetary Fund is a rightwing politician more susceptible to arguments in favour of restraining public spending and cutting debt than the hell-for-leather growth promotion the radical left Syriza government wants to pursue. The Washington-based IMF is a major lender to Greece and has played a cautious game that involves forcing Athens to adopt the usual neo-liberal policies of labour market reform and privatisations. Lagarde has supported a scaling-down of the demands made on Athens and an extension of the current bailout, though a large gap has still to be bridged.

Vladimir Putin

Unrest inside the eurozone is an opportunity the Russian president is unlikely to miss. He welcomed Tsipras to Moscow a few weeks ago and hinted at aid for Greece should it leave the currency union. He has a war chest from years of oil tax receipts and would be happy to offer guarantees and loans for a deal that would upset Berlin and Washington, despite a domestic recession and the clamour from struggling state enterprises for extra cash. Greece is also a key Nato member and has a large army, which Putin would enjoy drawing closer to his sphere of influence.




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