Greece Flashes Warning Signals About Its Debt
By LANDON THOMAS Jr., The New York Times
APRIL 19, 2015
As the eurozone braced for the prospect of a default, financial markets were jittery last week and Greece’s own short-term borrowing costs were soaring. Repercussions of such a default are so difficult to predict that European officials have spent the last five years trying to avoid one.
After two international bailouts for Greece since 2010, about 90 percent of its debt is owed to its eurozone neighbors, the I.M.F. and the European Central Bank. At the moment, not one of those lenders is showing a willingness to give any additional payback relief to Mr. Varoufakis and the new left-leaning government in Athens.
Mr. Varoufakis’s next formal meeting with his country’s creditors is set for Friday in Riga, Latvia, where eurozone finance ministers are to assemble for their monthly gathering. Wolfgang Schäuble, the powerful German finance minister, said here last week that no one should expect the meeting on April 24 to resolve anything.
Unless the creditors agree soon to release the next allotment of bailout money, Greece could have trouble making a $763 million payment to the I.M.F. on May 12. It almost certainly would not be able to meet the €11 billion in payments to the European Central Bank, the I.M.F. and payments on Treasury bills in June and July.
Mr. Varoufakis’s main message in Washington was that Greece was doing its best to carry out painful economic overhauls called for under the bailout program, while remaining true to his government’s anti-austerity mandate. “We know we are bound to a program,” Mr. Varoufakis said in an interview late last week, before his private meeting with Mr. Buchheit. “But there is another principle here: democracy.”
When Mr. Varoufakis flew on short notice to Washington on Easter Sunday to ask Ms. Lagarde for some payment flexibility, he said publicly that Greece intended to meet its obligations. The statement at the time was taken as a commitment by Greece to do whatever it took to pay the I.M.F. and others.
Privately, however, Mr. Varoufakis told colleagues in Washington last week that he purposefully used the word “intend” as opposed to “will” in his public statements on Greece’s payment plans, according to people close to the finance minister who spoke on the condition of anonymity.
Mr. Varoufakis is also well aware that if Greece continues to meet its payment schedule as currently mapped out, the country will end up paying about 12 percent of its gross domestic product to its creditors during his first term as finance minister.
He has said that such a dynamic is not sustainable for a left-wing government elected on a platform of putting the interest of Greece’s electorate before its creditors. The country was just emerging from a deep recession before the January elections and is thought to be slumping back into one.
But many outside experts are saying that the cycle of creditor-imposed austerity in Greece must stop and that the only clean way to alleviate it would be through a significant debt cut.
“Greece’s official-sector debt should be forgiven,” said Ashoka Mody, a former senior economist at the I.M.F. who oversaw the fund’s austerity program in Ireland. “And we really need to get rid of this Washington-Berlin-Brussels supervision of Greece – this is the most corrosive part of the arrangement, and it undermines both Greece and Europe.”
Greece Endgame Nears
By Yves Smith, Naked Capitalism
Thursday, 23 April 2015 11:16
Despite the market jitters of last Friday, which were triggered in part by the recognition that the odds of Greece reaching a deal with its creditors are far lower than had been widely assumed, Greek-related coverage has ratcheted down, even as Greece seems certain not to get any funds released in the April 24 Eurogroup meeting and is very likely to miss the end of April deadline for getting its reforms approved by the Troika and Eurogroup.
But the official enforcers have gotten even firmer in their position: Greece must do its homework, as in prepare detailed reforms, and has to hew closely to the existing structural reforms. Christine Lagarde of the IMF last week increased the pressure by saying it would not give Greece a grace period on its payments coming due, as some had hoped.
Never mind that Greece has actually done more in the way of complying than any other European victim and has also shown the worst economic results. Various European officials have stated that they’d rather not have Greece default but they are not prepared to cut Greece any favors in order to avert that outcome. Making sure Greece complies, in other words, is worth the cost of what they believe will be short-term disruption. And they clearly don’t care one iota as far as the cost in Greek lives is concerned.
It’s puzzling to see the Greek government’s apparent failure to acknowledge that the Troika is effectively insisting that it cross its famed “red lines” such as pension “reform” and implementing labor “reform” which means further lowering wage rates. With another government, there could well be important jockeying going on behind the scenes, but heretofore, the ruling coalition has been disconcertingly open about its schisms. And Tsipras still seems to be hostage to the more radical representatives, who represent one-third of Syriza’s block. If they bolt, he no longer has a working coalition.
But if the government plans to hold firm, it really should impose capital controls, which would allow it to talk more openly to the public about what will happen if they do not reach a deal with their creditors. Similarly, if Syriza were to call referendum to convince its creditors that Greece really will default (and maybe exit) if they don’t budge (something the lenders seem to understand full well), it is similarly not clear how they can campaign candidly with no financial firewalls in place.
It is still astonishing that the European elites have convinced themselves that adhering to the procedures used to implement clearly unsuccessful austerity programs are so important as to justify creating a failed state. Is this what the European project stands for? It’s sadistic and destructive, but there seem to be no cooler heads who can deter the power players, the ECB and the IMF, from this course of action.
Greek default? Wall Street says don’t risk it
By Ben White, Politico
4/23/15 12:31 AM EDT
Some say they are not as freaked out as they were in 2012 about the prospect of always-in-crisis Greece getting kicked out of the eurozone, which could happen if a deal isn’t reached quickly. Some would even like to let the Greeks go and move on with life.
But then people mention Lehman Brothers. And the Russian default. And even an assassination in Sarajevo in 1914. And theoretical discussion of how better prepared the world is for a Greek exit quickly turns into fevered rumination on how it still might spark global financial Armageddon.
Investors got a taste of just how risky a Greek default and possible euro exit could be last Friday when reports that a deal might not be reached helped spark a global sell-off that at one point saw the Dow Jones Industrial Average down over 300 points. Interest rates on Greek debt also rose to two-year highs.
Rates on other European debt, including the debts of Portugal and Italy, also initially rose before ECB buying kicked in, suggesting that if Greece falls, investors could then start to punish other nations viewed as vulnerable to default. Spiking rates could turn once manageable debt loads into crushing burdens.
Fears over this kind of vicious cycle leave many big Wall Street money managers and executives skeptical of the argument that the world is now prepared for a Greek exit and that such an outcome might actually be preferable to going through these near misses over and over.
These money managers say that if Greece does wind up leaving the eurozone, it will probably not be a “Grexit” at all. That phrase, they say, connotes an orderly process in which the country’s euros are carefully replaced with drachma and nobody panics and pulls all their money out of the bank.
Instead, many Wall Street executives say it’s more likely that a Greek departure would be an accident – now known on Wall Street as a “Graccident” – in which the county is forced out of the eurozone by bank runs and a collapse in investor confidence.
“If a ‘Graccident’ were to occur, it would be very messy,” said Mohamed A. El-Erian, chief economic adviser at global money management firm Allianz. “And the global economy is still too fragile to take a major shock. The good news is that Europe has done a lot to increase its defenses against contagion. But it could still be very dangerous to stumble into an accident.”
The case for not caring much about a “Grexit” holds that most of the nation’s debt is now held by other countries rather than banks, making financial system failures less likely. Meanwhile, European economic growth is picking up and should be able to withstand a period of turbulence, this line of thinking holds. And Greece has a tiny economy whose collapse would cause localized pain but register barely a blip around the globe.
Some top executives on Wall Street argue that it would be much worse for creditors to cave in to demands for more lenient terms from Greek’s anti-austerity political leaders. Because that would mean other debtor nations would also soon clamor for relief. Better to rip the bandage off and put an end to the charade that Greece will ever pay back all its loans.
But the more widely held view – in Washington and on Wall Street – is that while Europe has, indeed, built more firewalls and reduced private-sector exposure to Greek debt, the unknown reaction to a “Grexit” is potentially much worse than the annoyingly familiar and increasingly tiresome rounds of angst-ridden talks between Greece and its creditors.
“If Greece leaves, it will never be possible to say again that exit is impossible, and if exit is always possible then you put increasing pressure on the weaker countries,” said Summers. “Of course, it’s also not tenable for the euro area to firmly establish that exit is impossible, or no country will feel any disciplinary pressure. So the matter is quite delicate, and we all have to hope and push for a mutually satisfactory conclusion.”