17th Jul 2019

Is Greece about to default?

  • Greece used emergency funds to repay the IMF (Photo: flatcap2009)

Only a few hours after a Eurogroup meeting which hat-tipped progress in Greece bailout talks, Athens appears to be on the edge of bankruptcy.

The Greek government said on Monday it would repay a €750 million tranche of International monetary fund (IMF) loans. But it emerged, on Tuesday (12 May), that it used €650 million from an IMF emergency account and €100 million from domestic a cash reserve to honour the deadline.

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Does it mean Greece is closer than ever to defaulting?

"The liquidity situation is a terribly urgent one," Greek finance minister Yanis Varoufakis told reporters after Monday’s Eurogroup meeting.

He added that "we’re talking about the next couple of weeks" before “liquidity constraints become binding".

The IMF payment done, other repayment deadlines, worth €3 billion in total, loom in May.

A €1.4 billion repayment of treasury bonds is due on 15 May.

This could be offset by a new bond issue, something Greece already did in preceding months. But the holders and buyers of the bonds are almost all Greek banks and the money comes from Greece itself.

On 6 May, the European Central Bank raised the cap on emergency liquidity assistance, allowing Greek banks to draw €2 billion more from the Greek central bank in order to buy the state papers.

On 12 May the ECB raised the cap again by €1.1 billion to €80 billion.

More problematic is payment of pensions and (half of) public sector salaries on Wednesday (13 May), as well as the second half of the salaries at the end of May.

Pensions and salaries cost the Greek state about €1.6 billion a month.

But the government in late April got its hands on €600 million when it ordered local authorities and public bodies to transfer cash to Athens.

When or if the deadlines are met, Greece will have reached the end of two-week period mentioned by Varoufakis before “liquidity constraints become binding".

At this point the need for a deal with Greece’s creditors, to unblock the €7.2 billion left in its bailout programme, will become acute.

The risk of a Greek default, and its potential eurozone exit, has hung over the bailout talks ever since prime minister Alexis Tsipras and his far-left Syriza party came to power in January.

But with both sides trying to use the threat of default to spook each other, it’s hard to assess the real danger.

Even EU officials say they don’t know the real financial situation in Greece.

The situation prompted German finance minister Wolfgang Schaeuble, last week, to warn of a default by accident, telling the Frankfurter Allgemeine Sonntagszeitung newspaper that “experience elsewhere in the world has shown that a country can suddenly become unable to pay its bills”.

At the same time, a top EU official said "when a country wants to pay, it finds the way to do it", in a statement which calmed nerves.

Meanwhile, in Athens, people are trying to decipher what Varoufakis means when he says "binding liquidity constraints".

“This would not be a kind of default. Maybe we’ll have difficulties to manage public cash," a Greek official told EUobserver.

In a recent analysis for the Bruegel think-tank, economist Zsolt Darvas also estimated Greece will be able to meet its financial obligations "at least perhaps till the summer".

"Given the huge stock of financial assets the Greek government has, I am always cautious about reports that it will soon run out of cash," he said.

Darvas noted that "at the end of September 2014, the Greek government had assets worth €86.6 billion”. He said that even if "assets have most likely been depleted significantly during the past six months", the government still has plenty left to sell.

His analysis assumes that a deal will be reached before the end of the current bailout programme, on 30 June.

But it also implies there’s unlikely to be a bank run, panic on financial markets, or an accidental euro-exit even if talks drag on.

In the worst-case scenario, Greece might have to impose capital controls.

Varoufakis ruled out this possibility on Monday, on grounds that "capital controls and the monetary union are a contradiction in terms".

But capital controls were put in place in Cyprus after its two main banks collapsed in 2013 and were fully lifted only last month.

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