ANKARA
In the battle over a bailout for Greece, neither the creditors nor the Greek government seem willing to concede.
But a failure to agree could have consequences not just for Greece, or Europe, but for the entire world economy, international economists told Anadolu Agency on Friday.
Greece must make a total of €1.5 billion ($1.63 billion) in loan repayment to the International Monetary Fund in June – the first one of €300 million is due on June 5. Then the country must come up with €2 billion ($2.2 billion) on June 12 to cover short-term Treasury bills, and another €1.9 billion ($2.1 billion) for more T-bills on June 19.
“Time is running out fast for Greece, in tandem with the state’s dwindling cash reserves,” commented Konstantinos Venetis, an economist with Lombard Street Research in London. The country is almost entirely dependent on emergency loans from the European Central Bank to keep its banks and public services running, and the banking system is under severe strain as deposits flow out elsewhere, Venetis pointed out.
But creditors are insisting that Greece completes a long list of belt-tightening economic reforms, and the SYRIZA government, elected on putting an end to austerity, just refuses to accept. While Greek Prime Minister Alexis Tsipras said on Tuesday that “an agreement would be completed soon,” the EU didn’t agree, announcing on the same day that “a staff-level agreement was being worked on.”
“It’s a standoff,” warned Christopher Dembik, an economist with Saxo Bank in Paris, “and one that could be dangerous for Greece, for Europe as well as for the global economy.”
Dangers of default
Dembik pointed out that Greece is close to running out of money, and, unless there is an agreement with the creditors, will not have access to the next tranche of €7.2 billion ($7.8 billion) in bailout funds.
“Greece needs a bailout agreement badly, but, for political reasons, is having trouble accepting creditors’ conditions on reducing public spending,” Dembik said. “The government may not realize how extensive the consequences of a default could be.”
One issue that would have to be addressed is the status of Greece’s Target 2 loans from the ECB. Greece has close to $50 billion in these liabilities, which come from fund transfers to other European central banks. Were Greece not to honor these debts, the European system would face serious stress, as other countries profited by the example.
But the euro system itself could be damaged by Greek default, as John Simister, an economics professor at the University of Manchester, explained.
“A default would reduce people’s trust in the euro as a currency,” Simister said. “I think it would cause long-term damage to the whole Euro-zone, and all of EU. Argentina's defaults (e.g. in 2001) are still causing chaos, as some corporations who lost money demand payments (e.g. withholding Argentine ships).”
But a default could also deliver a nasty shock to the global economy, said Allan von Mehren, an economist with Danske Bank in Copenhagen.
“The loss of confidence in the EU and the euro could reverberate right through stock exchanges and finance all around the globe,” von Mehren said.
Worse still, a Greek default will mean that Germany will need to finance the economic recovery of Greece, Demik said. “Recovering from a Greek default will mean that financing will have to come from a number of EU nations, but with Germany taking the lead. This is not likely to be politically popular in Germany,” Demik said.
Dangers of a ‘Grexit’
There is no necessary link between a Greek default, and a ‘Grexit,’ a Greek exit from the euro. But that might prove to be the next step, one that economists say would be disastrous.
“Greece’s leaving the euro would lead to instant high inflation in Greece, and a run on an already weak banking system,” said Iain Begg, an economics professor with the London School of Economics.
“It would throw the euro system into doubt: I imagine that this would mean that the euro would not be seen as an irreversible currency, and every time another country has a problem, it will assume a strategy like this,” said economist Gregory Claeys, an economist with the Brueghel think tank in Brussels.
Further, a “Grexit” would be disastrous for Greece, which would be forced to issue worthless drachma as its currency. All banking relationships would be ruined if a “Grexit” actually took place, Claeys said.
But Claeys said that a “Grexit” is most unlikely. “It is in the interest of both parties to reach an agreement. It is the best solution for the creditors and for Greece, and both sides know it, even if they are tough negotiators.”
Weakness of Greek economy
Apart from all the considerations about a “Grexit” or a Greek default, the Greek government has to find ways to strengthen the economy, Begg said.
“Exports are weak, and governance for business is poor, creating a bad climate,” Begg said. “The SYRIZA government might have addressed all this, but they have been too busy dealing with the day-to-day of the bailout negotiations.”
Begg pointed out that Greece is unlikely to attract the investment it needs if it defaults or, even worse, leaves the euro.
“The Greek government must raise the value of the country’s exports, if there is to be growth,” Begg said. “That requires investment, and the government knows that attracting investment after a default will be terribly difficult.”
The Greek economy has already been damaged by the liquidity crisis. “There has been a serious drain in bank deposits of roughly €30 billion,” explained economist Christian Schulz of Berenberg bank. “There has been a 14 percent year-on-year drop in tax revenues in January to February. And there has been a relapse into recession as GDP shrank moderately in the fourth quarter of 2014, and the first quarter of 2015.”
“The creditors will get their deal, and Greece will endure a punishing period of austerity again. The Greek government simply has no leverage of any kind. So citizens will suffer, and, hopefully, there will be enough confidence to attract investment so that exports will gain market share,” said Schulz.
“It’s possible a third bailout will be necessary to keep Greece afloat, even if an agreement is reached,” Venetis of Lombard Street said.
