Prospects for a Grexit Get Real (6/29)     Print Email

By James D. Spellman, Strategic Communications LLC

Default on an already re-scheduled debt payment to the IMF seemed inevitable Tuesday as a near-bankrupt Greece stepped closer to exiting the eurozone, following the tumult of bewildering events over the weekend that included scheduling a July 5th referendum on the latest bailout proposal, imposing capital controls and closing banks to staunch the hemorrhage of cash withdrawals that capped emergency funding from the ECB could not stem. Markets worldwide plummeted in response to the dire outlook.

Reports quoted numerous officials confirming that Greece will not repay the International Monetary Fund €1.6 billion ($1.8 billion) Tuesday.[1] Greek Finance Minister Yannis Varoufakis had been insisting for some time, however, that this debt could be paid on time if the ECB were to release €1.9 billion in profits it made while holding Greek bonds. Not meeting the payment would put Greece in “arrears,” to use the IMF term, the only advanced country to do so (see chart showing previous defaults).

Much is unclear over the next steps and consequences. “A senior EU official said a non-payment to the IMF would not automatically trigger a default on eurozone government loans to Greece,” Reuters reported.[2]

More defaults seem likely on July 10, when Treasury bills worth €2 billion must be repaid, and on both July 20 and August 20, when €3.5 billion and €3.2 billion, respectively, in bonds are due to Eurozone creditors. (See chart “What’s Next for Greece?”)


Source:   Mehreen Kahn, “What happens if Greece defaults on its International Monetary Fund loans?” Daily Telegraph, June 4, 2015.

Under the capital controls announced Sunday, banks are closed up to and including July 6. “In the coming days, what’s needed is patience and composure,” Greek Prime Minister Alexis Tsipras said on television. “The bank deposits of the Greek people are fully secure. The same applies to the payment of wages and pensions -- they are also guaranteed.” Wages and pensions will be paid but daily ATM withdrawal will be limited to €60 euros ($67); no restriction on foreign tourists using ATM). Electronic transactions are unaffected, meaning Greek debit/credit cards can be used. Early Sunday, the Greek government had continued to resist pressure to close banks on Monday morning, as Varoufakis tweeted. But the ECB’s decision not to raise emergency liquidity assistance beyond the current €89 billion cap forced a change.  




Source: Mark Deen, Arne Delfs and Christos Ziotis, “Merkel and Hollande Turn Away From Greece.” Bloomberg, June 29, 2015.

The capital controls followed what the BBC called “one of the most momentous decisions the ECB has ever faced, since the euro was launched on January 1, 1999.”[3] "Following the decision by the Greek authorities to hold a referendum and the non-prolongation of the EU adjustment programme for Greece, the Governing Council declared it will work closely with the Bank of Greece to maintain financial stability," the ECB statement said. Observers saw the move as a strengthening of the ECB hardliners, notably Germany’s central bank President Jens Weidmann.


Greece scheduled a July 5 (Sunday) referendum on a bailout proposal its leader excoriated as “blackmail,” destroying all hopes that arduous, months-long negotiations would release the creditors’ funds that Athens needs to repay debt by deadlines tomorrow and ahead.

"I call on you to decide - with sovereignty and dignity as Greek history demands - whether we should accept the extortionate ultimatum that calls for strict and humiliating austerity without end, and without the prospect of ever standing on our own two feet, socially and financially," Tsipras told a stunned nation Saturday.

"The people must decide free of any blackmail," he added, arguing for a “no” vote because the creditors’ proposals "clearly violate European social rules and fundamental rights" and are aimed at "humiliation of the Greek people."

In response to this maneuver, after its fifth emergency meeting in nine days, the Eurogroup first rejected Greece’s request to extend the bailout until after the referendum and then began considering an unprecedented “Plan B,” or Grexit. “Regrettably, despite efforts at all levels and full support of the Eurogroup, this proposal has been rejected by the Greek authorities who broke off the programme negotiations late on the 26 June unilaterally,” said the joint statement from the finance ministers for 17 EU members.


Several ministers followed with individual statements suggesting that the plebiscite increased the risks of Grexit. But Greece would have to ask to leave the EU, Austrian Finance Minister Hans Jörg Schelling explained, and encouraged Greece to impose a “bank holiday” and other capital controls to prevent a run on the banks. “Monday could be a bank holiday,” said Michael Noonan, the Irish finance minister. “It is not a question of waiting to see what might happen on Monday in terms of a crisis. The crisis has commenced.”

Yannis Stournaras, governor of the Bank of Greece, insisted that Greek central bank would “take all measures necessary to ensure financial stability” but it’s unclear how much money it has to transfer so banks can cover cash withdrawals. More than a third of Greece's cash machines ran out of cash on Saturday before being replenished, Reuters reported.[4]

Two nationwide polls published in Greek newspapers Sunday showed support for a deal before Tsipras announced the referendum. Proto Thema (First Topic) found that 57 percent of those surveyed believe Greece should make a deal with its EU partners, while 29 percent want to break away. The poll by center-left To Vima (The Tribune) shows fewer (47 percent) wanting to negotiate with Brussels.

The 68-word ballot question asks voters for their opinion on two highly technical documents that were only translated into Greek on Saturday:

“Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25 and which consists of two documents:

‘‘The first document is called Reforms for the Completion of the Current Program and Beyond and the second document is called Preliminary Debt Sustainability Analysis.

  •       ‘‘Those citizens who reject the institutions’ proposal vote: Not Approved / NO
  •       ‘‘Those citizens who accept the institutions’ proposal vote: Approved / YES.’’

One voter’s thoughts illustrate the dilemma, confusion, and fears of his fellow Greeks. ‘‘People will vote based on whether they want the harsh measures or not, they may not realize that they’re actually voting on whether to stay in the euro,” Erato Spyropoulou told the media. “I don’t want the harsh measures either. I’m in debt, but I don’t want to leave Europe.”

Either response – a “yes” or a “no” – will have extremely difficult consequences for Greek. A “yes” would likely force Tsipras to dissolve his government because it would be required to finalize a proposal his party vehemently opposes. The resulting political instability would make it impossible for the new leaders to negotiate a deal with the troika. Should a “no” vote win, the Eurogroup would step up Grexit preparations into uncharted areas.

IMF head Christine Lagarde questioned the point of the vote since, noting that the proposal being voted is off the table.

Investors’ concerns were demonstrated in the sell-off as markets worldwide closed in the red. Asian markets indicated what was to be the pattern in Europe and North America, with Tokyo down 2.8 percent from Friday while Hong Kong fell 2.61 percent. In Europe, Frankfurt’s DAX 30 lost 3.56 percent, London’s FTSE 100 fell 1.97 percent, and Paris dropped 3.74 percent. U.S. market indices were all trading down roughly one percent mid-day.

Meanwhile, the leaders of Europe’s three largest economies were signaling their retreat from a bailout deal for Greece. “Merkel and Hollande, who have repeatedly said they want to hold the euro together, gave the Greek premier no leeway after he broke off negotiations over future bailout aid,” Bloomberg reported.  “Hollande suggested the referendum would determine whether Greece could stay in the 19-nation euro area, while Merkel said Europe’s credibility was at stake with its response.”[5] And Italian Prime Minister Matteo Renzi tweeted, “The point is: greek referendum won’t be a derby EU Commission vs Tsipras, but euro vs drac(h)ma. This is the choice.” Concluded a clearly frustrated EU Commission President Jean-Claude Juncker, “…we really moved mountains until the very last minute when Greek authorities closed the door. (..) What is at stake here is the essential spirit of European shared solidarity and responsibility. “


[1] Reuters, “Greece will not pay IMF loan due on Tuesday: government official.” June 29, 2015.

[2] Reuters, “Factbox: What happens next if Greece defaults on IMF?” June 17, 2015.

[3] ECB statement: “The Governing Council of the European Central Bank today welcomed the commitment by ministers from euro area Member States to take all necessary measures to further improve the resilience of euro area economies and to stand ready to take decisive steps to strengthen Economic and Monetary Union.

     “Following the decision by the Greek authorities to hold a referendum and the non-prolongation of the EU adjustment programme for Greece, the Governing Council declared it will work closely with the Bank of Greece to maintain financial stability.

     “Given the current circumstances, the Governing Council decided to maintain the ceiling to the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided on Friday (26 June 2015).

     “The Governing Council stands ready to reconsider its decision.”

Mario Draghi, ECB President, said: “We continue to work closely with the Bank of Greece and we strongly endorse the commitment of Member States in pledging to take action to address the fragilities of euro area economies.”

Before the decision: Emergency lending assistance “has been provided for a protracted period of time and has become the banks’ only source of funding. This casts doubt on their financial solidity,” Germany’s central bank President Jens Weidmann said Thursday. “The latter is especially undermined by Greek policy decisions that have sparked capital flight and large-scale cash withdrawals.”

[4] George Georgiopoulos and Lefteris Papadimas, “More than a third of Greek ATMs run dry for a while on Saturday.” Reuters, June 27, 2015. .

[5] Mark Deen, Arne Delfs, and Christos Ziotis, “Merkel and Hollande Turn Away From Greece.” Bloomberg, June 29, 2015.