Missed Payment

Frustration Builds in Athens

greece photo 2 july 1 dpa
An employee of a Greek National Bank branch on Wednesday was mobbed by retirees grabbing for "priority'' tickets enabling them to withdraw up to €120 from their monthly pensions.
  • Why it matters

    Why it matters

    Greece’s failure at midnight to make a payment to the IMF could exacerbate the country’s financial woes and accelerate its exit from the euro zone.

  • Facts

    Facts

    • Greece missed a €1.6 billion payment at midnight to the IMF, falling into arrears.
    • Other countries in arrears to the IMF include Zimbabwe, Cuba, Sudan and Somalia.
    • The ECB is working on a plan to divert funds to stave off a Greek euro exit.
  • Audio

    Audio

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Four days before Greeks go to the polls to determine their future in the euro and in Europe, the nation crossed a financial rubicon at midnight, missing a €1.6 billion ($1.7 billion) payment to one of its creditors, the International Monetary Fund.

Hours later, elderly Greeks stormed offices of the Greek National Bank, mobbing employees in an effort to get priority places in line to withdraw up to €120 against their monthly pensions.

The country’s non-payment, the first by a developed nation to the IMF, increased the sense of urgency in Athens, where the Syriza-led government under Prime Minister Alexis Tsipras tried and failed again late Tuesday to appease creditors.

The missed payment put Greece in a dubious club of failed nation states such as Zimbabwe, Sudan and Cuba, which also are in arrears to the IMF. Holger Schmieding, the chief economist at Berenberg Bank in Germany, said the Greek government’s decision to not pay the IMF put it on an ominous track.

“Anybody wanting to know more about the direction into which Syriza policies would be taking Greece in the long run, take that as your first hint,” Mr. Schmieding, referring to Cuba and Zimbabwe, wrote in a note to clients.

Despite rising frustration in the Greek capital, where consumers on Wednesday remained cut off for the third day from banks and limited to daily cash withdrawals of €60, financial markets continued to bet Greece and its lenders would reach a last-minute compromise.

And sure enough, the European Central Bank, one of Greece’s largest creditors, is working on a plan to divert money from another source to help the country avoid bankruptcy and stay in the euro, according to information obtained by Handelsblatt.

By midday in Berlin, financial markets were relatively unmoved by the escalating cycle of recrimination and rhetorical blame emanating from European capitals.

At 11:30 a.m. in Berlin, the German DAX Index was up 109.10 points, or 1 percent, at 11,054 points in Frankfurt, slightly above its level last Friday before Mr. Tsipras called a snap national referendum on the lenders’ offer for this Sunday.

The euro was trading in Europe at $1.11, little changed from its level of last week.

While financial experts were expecting both Greece and its lenders to step back from the financial abyss of their stalemate, there were few signs Wednesday in Athens or the rest of Europe that a compromise was imminent.

In Germany, the Bundestag was scheduled to debate the Greek emergency in an open session this afternoon. The Eurogroup gathering of euro zone finance ministers was scheduled to meet at 5.30 p.m. in Brussels, while Mr. Tsipras was also expected to address the public again this afternoon.

Polls show Germans overwhelmingly favor Greece leaving the 19-country currency bloc rather than lenders, including Germany, loan the country more money.

In Athens, a poll released by a newspaper, Efimerida ton Syntakton, suggested voters were prepared to support Syriza’s recommendation and vote on Sunday against the lenders’ bailout offer. But support for Syriza’s hard line appeared to be waning, the poll suggested, as the hardships endured by Greeks this week persisted.

According to results of the poll reported by Reuters, which was taken earlier this week after Mr. Tsipras called the upcoming referendum, 54 percent of Greeks are prepared to reject the lenders’ offer, and only 33 percent said they were ready to defy the government and take the offer. The gap has narrowed since the nation’s banks closed on Monday however – the newspaper said only 46 percent of those polled since banks were shut on Monday said they still supported the government, compared to 57 percent of Greeks who supported Syriza’s position in initial polling on Sunday.

By missing the payment to the IMF, Greece will miss out on a further €16 billion chunk of its existing bailout program which was to be provided by the IMF. The IMF, in a statement, said it would withhold more money until Greece repaid its obligations.

In Athens, a polls released by a newspaper, Efimerida ton Syntakton, suggested voters prepared to support Syriza's recommendation and vote on Sunday against the lenders' bailout offer.

Greece will officially be considered bankrupt, the IMF said, when the country fails for the first time to make scheduled repayments to its commercial creditors, rather than its public creditors. That could happen as soon as July 10, when the country is supposed to pay €2 billion in interest on Greek treasury bills. On July 13, Greece is again due to repay the IMF €453 million.

In the end, the European Central Bank, the steward of the euro currency, may play the make-or-break role in deciding whether to keep Greece in the euro.

Overnight emergency loans from the Frankfurt-based bank are keeping the Greek financial system alive. Should the ECB decide to cut off the support, it could force Greece’s hand and make the country issue a new currency.

On July 20, Greece is due to repay the ECB €3.5 billion. The country has no visible means of coming up with the money to make the payments, and its second bailout package from its troika of lenders including the IMF, ECB and European Commission, effectively expired at midnight on Tuesday.

On Tuesday night, Mr. Tsipras presented a new, two-year aid proposal calling for a third bailout of some €29.1 billion and a parallel debt restructuring in a last-ditch effort to break the gridlock. Handelsblatt reported that the letter also includes language saying Greece only has to pay its debts back to European countries in a manner “that secures the survival of the Greek economy, its growth and social cohesion.” It’s a caviat the one Eurogroup official rejected out of hand, saying it would allow the government to potentially “never” pay the funds back.

The Financial Times  reported Wednesday that Mr. Tsipras, in a later letter sent to creditors and elaborating on the third bailout request Tuesday night, had accepted many of the creditors’ demands, though with some caveats that could yet thwart a deal.

 

athens july 1 greek national bank employee beseiged by patrons source dpa
Panic gripped a group of retirees outside a Greek National Bank branch in Athens on Wednesday, as pensioners mobbed a bank executive for “priority” tickets to withdraw their pensions. Source: DPA

 

The German chancellor, addressing lawmakers on Tuesday from her conservative Christian Democratic Union party, made clear that there would be no negotiations on a third bailout before Sunday’s referendum in Greece.

The German economics minister, Sigmar Gabriel, said that if Greece canceled its planned referendum, talks could begin immediately. There were no signs Wednesday however that Greece would rescind the vote this weekend.

Working out a third package won’t be easy. The Bundestag, the lower house of the German parliament, would have to give its blessing before the German finance minister, Wolfgang Schäuble, could even begin talks.

And it’s unclear how Greece could be kept afloat during the negotiations.

Despite the confusion, the hurried proposals and counter-proposals, the threats, the warnings, the populist rants on both sides, markets are relatively calm for now.

After all, the actions of the IMF tend to be deliberate and slow and there will unlikely to be any immediate consequences from yesterday’s missed payment.

But the date that is causing trepidation across Europe, and particularly at the ECB’s new skyscraper tower in the German financial capital, is July 20, when Greece will have to repay more than €3.5 billion in maturing bonds held by the ECB.

The central bank bought those bonds as part of its Securities Markets Program, its first bond purchase program conducted between May 2010 and September 2012.

The German chancellor, addressing lawmakers on Tuesday from her conservative Christian Democratic Union party, made clear that there would be no negotiations on a third bailout before Sunday’s referendum in Greece.

ECB President Mario Draghi, who throughout the crisis has been accused of financing governments through the back door with his bond purchases, is likely to be particularly worried.

“He has a legal problem and a credibility problem,” said one euro zone representative.

Until now, Mr. Draghi has been able to point out that no euro bond it bought ever defaulted. That applies to the SMP as well as to the massive bond-buying program the ECB launched in March to revive the euro zone economy.

“After a default by Greece, Draghi would be in a different world,” said one euro official.

That is why ECB officials are searching for a way out.

One plan being discussed by the ECB and euro member states involves the euro bailout fund, the European Stability Mechanism, taking the problem off the ECB’s hands by using money earned on Greek bonds in the past.

The ECB bought those bonds at relatively low prices.

As they matured and Athens repaid them in full, the ECB earned a profit which was transferred to governments via the national central banks of the euro zone. Because these banks didn’t want to be seen earning a profit from the euro crisis, they have been transferring the money back to the bailout fund since 2012.

 

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The scene outside another Athens branch of the Greek National Bank, where bank customers and senior citizens thronged to use bank machines. Source: AFP

 

At present those profits amount to €1.8 billion. In addition, a further €300 million in SMP profits are expected to accrue in early July, plus a further €1.5 billion before the bonds mature.

As Greece’s existing bailout program has now expired, that money in effect belongs to the euro countries. But it could also be scraped together to service the Greek bonds coming due on July 20, financial sources said.

Mr. Draghi’s problem would be solved. For the time being.

But not all euro governments are happy with this plan.

The SMP profits aren’t real profits, they’re merely a compensation payment from national government budgets, said sources in the German government. “Why should we pay a Greek debt with German taxpayers’ money?” said one government official.

The Bundestag would need to approve such a move.

There’s another problem to consider. If talks on a third bailout package do start next week, Greece will have to receive interim financial support while the negotiations take place.

The ECB will have to keep the Greek banks afloat with emergency credit under its Emergency Liquidity Assistance facility. “If Greek bonds default at the ECB, it really has to shut down ELA or at least sharply reduce it,” said financial sources.

There’s a time bomb ticking in the ECB’s books. It needs to be defused by July 20.

 

Kevin O’Brien is editor in chief of Handelsblatt Global Edition. Jan Hildebrand and Donata Riedel are Handelsblatt editors who cover government and politics for the newspaper in Berlin. To reach the authors: obrien@handelsblatt.com, hildebrand@handelsblatt.com and riedel@handelsblatt.com

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