Greece's bankruptcy could become a reality next month. "The four installments due in June with the IMF amount to one billion and 600 million euros: money that will not be paid, because we don't have it", Interior Minister Nikos Voutsis announced yesterday on Mega TV, underlining that the EU and the IMF are setting "unacceptable conditions" in exchange for the release of the 7,2 billion aid installment agreed in February. In particular, the Syriza government does not intend to give in on pensions and on the restoration of collective labor agreements, issues on which Angela Merkel proved to be more rigid than in the past during the last European summit in Riga. Now the dilemma is on the table of the G7 which will meet in Dresden on Thursday and Friday.
THE HYPOTHESIS OF THE AGREEMENT
If the two parties find an agreement in extremis, it would not be a question of a definitive solution. With the 7,2 billion transfer, Athens would pay the June installment to the IMF and another 3,5 billion to the ECB due in July. But the bankruptcy risk would only be postponed, given that the country would need at least 30 billion just to survive the summer. Closing the ongoing negotiations, therefore, would only buy time to conduct a new negotiation. This would continue to fuel the vicious circle in which Greece, the EU and the IMF have been trapped for years, not to mention the fact that this time yet another aid package would risk not obtaining the go-ahead from some national parliaments, led by the Bundestag.
THE GREXIT SCENARIO
As for Grexit, according to the Greek Finance Minister, Yanis Varoufakis, the failure with a return to the drachma would be a "catastrophic" event, which would mark "the beginning of the end of the euro". But as to what would happen after an eventual exit of Athens from the single currency, there are only hypotheses. It is likely that Greece would have to block capital flight, nationalize banks, mint money and ramp up inflation to finance itself, since the capital market would be closed even for short-term loans. Interest rates would skyrocket and the drachma 2.0 would suffer a colossal devaluation, while private debts could continue to be denominated in euros. Of course, for exports the weak currency would be a godsend, but Greek exports cover a small portion of GDP and would hardly be able to drive a recovery.
THE IDEA OF AN ALTERNATIVE CURRENCY TOGETHER WITH AIDS
There is also a third way: Greece could fail without leaving the euro, temporarily introducing a parallel currency to pay public salaries and pensions. However, this hypothesis would not prevent bank failure, because in the event of insolvency the ECB would have to cut the ELA emergency aid system, depriving the Greek credit system of the only support it still enjoys. Therefore, the problem of negotiating a new international aid plan would probably arise again.
THE BANKRUPTCY OF 2012
In reality, Greece already defaulted in March 2012. Technically it was a "haircut", as it was called, but the result was still a massive loss for creditors: private investors suffered a write-down of more than 70%. of the nominal value of the Greek government bonds they had in their portfolio, allowing Athens to reduce its public debt stock by 100 billion euros.
WHO WOULD SUFFER THE LOSSES TODAY? SOCIALIZATION OF THE DEBT
Today, the loss would fall on European taxpayers, after the burden of Greek debt has shifted from credit institutions to states in recent years. The intervention involved all EU countries, pro rata, in exchange for the go-ahead from the Athens government to austerity policies.
Between 2009 and 2014, Germany, France and Italy inflated their public coffers exposure to Athens respectively from zero to 61,64 billion, from zero to 46,56 billion and from zero to 40,87, 45 billion. In the same period, the exposure to Greece of German, French and Italian banks decreased respectively from 13,51 to 78,82 billion, from 1,81 to 6,86 billion and from 1,06 to XNUMX billion.
This step was possible thanks to an indirect mechanism. Basically, European states have never lent money directly to Athens, but have financed state-saving funds (first the EFSF, then the ESM), which transferred the funds to the Greek central bank, which in turn it sent the liquidity to Greek private institutions, which used those resources for the most part to repay debts. That is why only a small portion of the international aid granted to Greece reached the real economy. Always Between 2009 and 2014, Greece saw its unemployment rate rise from 16% to 25% and its debt soar from 125% to 175,5% of GDP, which itself fell by 25%.
HOW WOULD THE MARKET REACT TO A NEW FAILURE?
No one can know for sure, even if the socialization of Greek debt has reassured many analysts. In any case, the fear of the risk of contagion has not completely disappeared. The fear is that international speculators could sell Europe's government bonds en masse, believing (or pretending to believe) that the Greek destiny could also affect other countries.
The goal would be to go back to speculating on changes in the spread, but it would still be a much more complicated strategy to pursue than in the past, given that the ECB's quantitative easing is now underway, and the Eurotower also has the arrows of the Ot. These are the Outright monetary transactions, the purchases of public bonds with an anti-speculative function whose announcement effect alone was sufficient to extinguish the market attack against the euro which took place in 2012 (the explanation on the website of the European Central Bank).
UPDATE:
Syriza has rejected the request of the extremist wing of the party not to repay the loans to the International Monetary Fund. The Central Committee rejected the proposal with 95 votes against 75 and a blank ballot. Requests to nationalize the banks and to hold a referendum that would give voters the power to reject any agreement with international creditors were also rejected.
"Greece and its creditors have an imperative need to reach an agreement as soon as possible", said Government spokesman Gabriel Sakellaridis, adding that the Executive aims to reach an agreement by the beginning of June: "As long as we are in a position to pay our commitments, we will pay them. It is the government's responsibility to be in a position to meet its obligations."
