Greece’s debt deadline looms

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.


3 thoughts on “Greece’s debt deadline looms”

  1. Jive Bunny says:

    “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.”

    Guy fails to mention that the 25% shrinkage is directly attributable to the Troika’s “rescue package” consisting of austerity on top of austerity in the form of spending cuts leading in turn to immense reductions in aggregate demand in the economy. His implication is that this is Greece’s fault when in fact it is equally Greece’s fault (for failing to implement the majority of employment reforms) and the troika’s (for failing to provide sufficient funds or loans and demanding cuts that are too large).

    Guy needs to do some homework on the Eurozone (EZ) re a new Greek Drachma, as it is a condition of EZ membership that a country adopts and uses the Euro. Therefore, if a country adopts it’s own currency this would automatically bar it from the EZ and thereby any further payments (loans) from the European Central Bank or the European Commission.


  2. David Lilley says:

    This is a very interesting piece and contains new ideas. You should have applied for the Wolfson £250,000 prize which was won by Capital Economics. CEs solution was far less sophisticated and you wonder how often CE may have contacted de la Rue, or similar, to enquire if they have had an order for Drachmas.
    I disagree with Jive Bunny. Since when has being a good Samaritan been interpreted as being a monster. The troika’ first bailout was enough to give every Greek family enough money to take a year’s holiday and enjoy an income greater than the UK NMW if the money had been distributed to all. They then got a second bailout and now expect a third.
    Without the good Samaritan their economy would be down more than 25%.
    The IMF is great institution and it has saved 100s of incompetent governments including the UK. Only three or four governments have ever defaulted on their IMF help.
    The IMF was supposed to take the lead whilst the other two members of the troika were to be just like other IMF lenders. This would have been the best way as it is the IMFs core business to rescue incompetent governments. Allowing the incompetent Greek government to take its bleeding heart stories to the ECB and the EU was always going to mess up the professional and oft repeated IMF rescue.
    We shouldn’t need to wonder whether Greece can pay its next repayment as the IMF should have had complete access to the books since 2009 and been the de facto government since that time.
    Living within your means is not austerity it is just what we all have to do. It might seem like austerity when compared to times past when you were living way beyond your means.
    There will not be a Grexit as the good Samaritan is too good for that. But give them another 7.2b Euro and they will rehire 48,000 civil servants and catch up on some debt repayments and then do an Oliver Twist and ask for more. The more we give them the more debt and the more necessary the need for more money. They will never go away.
    The only way forward is to let the IMF take charge and drip feed new money to where it is most needed.

  3. Jive Bunny says:

    Whilst the money originally lent was very large, unfortunately, it was only sufficient to allow Greece to meet it’s repayments – this left the Greek economy unsupported as it entered a recession which without financial support turned into a depression, indeed, the “good samaritan” was in fact a Trojan Horse and had to be more generous if Greece was to get out of it’s self inflicted problems, but that was not to be….

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