[Marxism] Spectre of Grexit back as cash runs out

Louis Proyect lnp3 at panix.com
Wed Apr 8 07:22:01 MDT 2015


Financial Times, April 7, 2015 3:56 pm
Spectre of Grexit back as cash runs out
By Ferdinando Giugliano, Economics Correspondent

Clouds gather over the parliament building in Greece, which may struggle 
with big repayments due in the coming weeks

“Grexit” is the phrase once again on everyone’s lips in Europe.

Even if Greece is able to pay back a €450m loan to the International 
Monetary Fund on Thursday, it will struggle to make the big repayments 
due over the next few weeks unless it strikes a deal with its eurozone 
partners, raising the spectre of default and, ultimately, the departure 
from the single currency that haunted Europe for much of 2012.

  “Grexit” is a concise term for a process that may be anything but 
swift and clear-cut. Lawyers and economists warn that any Greek 
detachment from the single currency union would probably be a great deal 
more complex and messier than previously thought.

“There is a lot of loose talk, but there are no mechanisms for forcing 
Greece to exit the euro — and they don’t seem to want to exit 
voluntarily,” says Benedict James, a partner at Linklaters, a law firm. 
“What is more likely is that the government will progressively run out 
of euros.”

Half in, half out

One scenario is that Greece could stay in the euro while being 
quarantined in a grey area that would test the limits of the single 
currency rule book. This could see the government imposing capital 
controls to prevent deposit outflows and issuing IOUs to creditors and 
civil servants to plug the government’s fiscal hole.

Stoking such concerns are the declining health of the banking system and 
the public finances. The deposit base of Greece’s lenders has shrunk by 
€23.6bn, or 14 per cent of the total, since November, according to UBS, 
the bank, and Greek lenders are increasingly reliant on emergency 
funding from the European Central Bank.

Meanwhile, tax revenues have been flowing in more slowly than expected. 
This is forcing Athens to scramble for money as it faces a challenging 
repayment schedule to its international creditors — a €458m payment is 
due to the IMF on 9 April — while having to pay pensioners, employees 
and suppliers.

Analysts note that, in the absence of a continued commitment by 
international lenders to fund the banks and government, either avenue 
could lead Greece out of the euro.

But there are intermediate steps the government can take to remain in 
the single currency without having to cave in to the demands of 
creditors demanding stringent limits on public spending as well as an 
array of structural reforms.

Capital controls

One option is the introduction of capital controls to limit the fallout 
from bank runs and stem money leaving the country. Such controls 
infringe one of the fundamental pillars of the EU; the free movement of 
capital, and their use is severely curtailed by the IMF.

Still, EU law allows countries to impose temporary curbs on withdrawals 
in order to preserve public security. The rescue of Cyprus in 2013, for 
example, included capital controls.

In the absence of a clear agreement with its eurozone partners and the 
IMF, Greece could end up in a legal wrangle, with companies and 
individuals testing the legitimacy of these measures at the European 
Court of Justice.

Prioritising payments

On the fiscal front, Greece may soon face a choice between honouring its 
debt to international creditors and paying suppliers and pensioners.

“Being the chief treasurer of the Greek government must be the toughest 
job in the world now,” says Reinhard Cluse, Chief Economist for Europe 
at UBS.

The Greek government can, in principle, decide how to prioritise 
payments. However, economists warn there are limits to what Athens can 
do because of the dependence of its banking sector on ECB lending.

“A sovereign is called a sovereign as it can decide who to pay first,” 
says Guntram Wolff, director of Bruegel, a European think tank. 
“However, Greece is not completely sovereign, as the ECB has leverage 
over what the government can do.”

A missed payment to international creditors could also spark panic among 
depositors. “Any missed payment by the state will lead to an 
acceleration of outflows. Inevitably, that will lead to a bank run,” 
says Athanasios Vamvakidis, an economist at Bank of America Merrill 
Lynch in London. “The government would then have to impose capital 
controls and call a bank holiday.”

Greece owes you

One way out could be to continue paying the ECB and the IMF while 
issuing IOUs to settle domestic commitments. “IOUs are not exit,” says 
Erik Nielsen, chief economist at UniCredit banking group, who adds that 
California issued IOUs during its own fiscal crisis in 2009 without 
having to abandon the dollar.

There are two limits to this process. The first is how acceptable these 
payments would be among suppliers and public sector employees.

  “A legally mandated payment in IOUs of what was previously a clear 
payment in euros could be challenged in the courts,” says Yannis 
Manuelides, a partner at Allen & Overy, the London law firm.

The second is EU law, which states that only the euro can have the 
status of legal tender. However, the Greek government could take steps 
to stimulate the circulation of IOUs — for example, accepting them as 
tax payment — without giving them official status.

“You can imagine a scenario when this goes on for quite a while,” Mr 
Nielsen says. “IOUs are traded on the street for 10 cents to the euro, 
people stop going to work, but the government does not print new 
currency. That would lead to a prolonged period of chaos, with the 
situation progressively getting worse.

“In the end, it all becomes a political choice by the Greek government”.




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