[Marxism] Spectre of Grexit back as cash runs out
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
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
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.
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.
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
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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