3rd June 2015
With Greece’s repayment deadline in sight and another instalment due this week, Rowan Dartington’s Guy Stephens assesses the potential outcomes…
This Friday sees another Greek payment due to the IMF but this is relatively modest at €300m. The real challenges come along in July when the next bail-out payment from the ECB is required to keep the Greek banks afloat, and that depends on a new deal having been done. It is probably quite likely that Friday will come and go and the payment will miraculously be made, even though supposedly the coffers are empty, if past performance is a guide.
And this is the point as evidenced by the hard line reiterated by the IMF on Sunday despite it being felt that a deal was close. There is very little trust between the IMF, the European parent and its wayward child. The view is clearly that it needs to stay in rehab for that much longer as no-one believes it will reform itself. One of the first things the new Tsipras government wanted to do was to remove the monitoring by the Troika of the ECB, EU and IMF. This is like saying, ‘ignore what has gone before, this time it’s different, trust us again, we have changed and let’s remove the supervision as well’.
As with any human being that is hooked on excessive debt, alcohol, food, drugs or smoking, words matter little without a concerted joint effort where the patient is contrite and totally committed to letting others control the supply of their vice, whatever it may be. When asking for help, you have to give up some element of control. With Greece’s situation, the government want more help, with less conditionality and less monitoring whilst the debt problem has become bigger and the economy has shrunk by 25%, reducing the chances of its creditors getting paid.
As a result, the possibility of an alternative currency being used for internal payments to pensioners and the like is becoming increasingly likely. There is precedent for this in Argentina which defaulted on its debts last year, causing the Peso to devalue. The difference with Greece is that it doesn’t have a national currency, yet. If it begins making payments to government workers and pensioners in IOU’s (probably Drachmas) then these will be exchanged for goods and services instead of using the Euro. The people will prefer Euros but better Drachmas than nothing. This is not uncommon in many emerging nations where the national currency is inferior to the US Dollar but both are accepted as legal tender. Internally, the national currency is used by the Government and people, but externally an international hard currency is preferred. However, there are controls as to what can be brought in and taken out.
In Greece’s situation, in order to stop a run on the banks, which has already been occurring, it would be important for the Government to fix the IOU at par with the Euro and then perhaps gradually widen the bands of exchange, rather similar to the policy adopted by the Chinese with the Yuan versus the Dollar. In the latter case, this was to stop currency appreciation and maintain international competitiveness. In the case of Greece, it will be necessary to instil confidence and stop panic but also to bring about a gradual devaluation. Arguably, this could be a mechanism to establish a new level for Greece to re-join the Euro at a later date.
It could also establish a mechanism for any aspiring country to join at the right level. In the UK, this was why Sterling fell out of the Exchange Rate Mechanism. We entered at the wrong rate, there was too little flexibility and there was a tumultuous day when we crashed out. This also happened overnight in Argentina when the official currency rate versus the US Dollar was no longer sustainable relative to the unofficial rate that many foreigners were using.
The sooner the Greeks realise that this alternative is their only way forward, the better. It is clear that the patience of the Troika has run out and comments from Mr Tsipras in the press criticising them is not likely to bring about any leniency from here – rather the opposite. It is looking more likely that an alternative currency will have to be issued for when Greece finally runs out of money in July. If this occurs, it will cause some more volatility in the Bond markets but when the world doesn’t end and the Euro remains, hopefully we can move forward from this impasse.