Capital Controls

Financial Gridlock Hits Greece

greece money machine lines sunday source afp
Tension builds in Greece as the country veers toward an exit from the euro zone. Greeks lined up Sunday night in Athens to withdraw euros before this week's forced shutdown of the Greek banking system.
  • Why it matters

    Why it matters

    A Greek exit from the euro zone could invite speculators to attack the currency driving down its value sharply.

  • Facts

    Facts

    • Greece and its lenders broke off talks last weekend.
    • Greek banks and the Athens Stock Exchange are closed this week.
    • German Chancellor Angela Merkel is supposed to address the situation 1.30 pm CET today in Berlin.
  • Audio

    Audio

  • Pdf

European markets tumbled Monday as concern rose that Greece’s national bankruptcy was imminent following a chaotic weekend of political brinkmanship that set the country on course for leaving the European common currency as early as this week.

Stock markets in Germany, France, Britain and in smaller countries slid across Europe by up to 4 percent as the Greek state shifted into emergency mode, closing the stock market in Athens and the nation’s banks for six business days.

The benchmark German DAX Index was down 2.9 percent, or 329.23 points, at 11,163.20 in Frankfurt trading at 4:52 p.m CET. The price of safe-haven investments such as gold and German government bonds surged as investors sought refuge from the stock market volatility.

Four years of negotiation between Greece and its international lenders appeared to finally break down after the failure of talks over the weekend and the snap decision by the Greek prime minister, Alexis Tsipras, to hold a national referendum on the lenders’ latest offer on Sunday.

Mr. Tsipras took the unusual step after the country’s lenders rejected a request to extend Greece’s bailout package by another month. The European Central Bank, one of the lenders, raised the stakes Sunday by saying that it would effectively no longer infuse the country’s banking system with emergency overnight cash, which prompted Mr. Tsipras to shut the banking system, only hours after promising Greeks he would keep it open.

“A Grexit,” said an experienced euro-zone official, “has never been closer.”

The mood in Athens appeared to still be eerily calm as Greeks lined up on Saturday and Sunday to withdraw cash from bank machines in preparation for a week when the country’s banking system, and much of its economy, is expected to shut down or move into subsistence mode.

Political recrimination dominated the Greek and European airwaves over the weekend as elected officials sought to lay blame for the breakdown in talks with their opponents.

The lender trio of International Monetary Fund, European Commission and European Central Bank was angered by the Greek government’s decision, made without consulting them, to call a national plebiscite on their latest offer next weekend.

In a televised speech to Greeks on Sunday, Mr. Tsipras blamed European lenders for their alleged intransigence and urged fellow Greeks to reject the lenders’ offer at the referendum on the weekend. Polls however showed that only a minority of Greeks were willing to follow Mr. Tsipras’ advice.

 

varoufakis sunday 28 june source dpa
The Greek finance minister, Yanis Varoufakis, sought to calm rising fears in Greece on Sunday as the government announced a shutdown of its stock market and banking system this week. Source: DPA

 

With negotiations and the Greek economy at a standstill, and Greek consumers increasingly rattled by a lack of access to cash and no visible prospects for a political solution, the four-year attempt to keep Greece in the euro zone appeared to have failed, with both sides unwilling to compromise.

A watershed event could come tomorrow, when Greece is required to pay €1.6 billion, or $1.8 billion, to the International Monetary Fund, its latest repayment to a trio of lenders that also includes the European Central Bank and euro-zone members.

Should Greece fail to make that payment, the country could slip into technical default, accelerating its exit from the euro zone and taking the economy into uncharted fiscal waters. The country may have to rapidly introduce a new currency and retool for the new realities of its life outside the euro zone. (For a review of the pessimistic scenario, click here)

But even as pessimism grew, some were still holding out hope for a last-minute compromise. Although no further talks had been scheduled as of Monday morning between Greece and its lenders, the German chancellor, Angela Merkel, was expected to address the situation later today. (For a review of the positive scenario, click here)

Ms. Merkel, whose country has led the hard-line bargaining position with Greece, could offer an olive branch that gives Greece and its political leaders one last chance to avert what may become an economic disaster for Greece and its 11 million citizens.

Ms. Merkel’s flexibility is limited, however, as most polls show that Germans oppose making further economic concessions to Greece, which has accepted billions in financial aid from lenders, including Germany, but has largely failed to deliver on many of its promised government and economic reforms.

Some observers were even pointing to Sunday’s scheduled nationwide referendum, noting that Greek voters, most of whom prefer to keep the euro, may defy their own political leaders and accept the lenders’ offer. Such a rebuff from Greek voters could lead to a shakeup in government or in some of its top officeholders, perhaps creating space for a last-minute compromise.

Others think that Mr. Tsipras, whose left-wing Syriza party was elected in January on a promise to end the country’s grinding austerity, may be intentionally throwing the situation to voters to prepare for a climb-down and eventual accession to lender demands, saying the people had spoken for him.

But as jittery markets assessed the odds of a so-called Grexit from the euro zone, a Greek national bankruptcy seemed on Monday all but inevitable after the events of the weekend.

Europe, meanwhile, appeared to be devoting its energy to containing the risk of contagion for the euro in the event of a Greek exit from the common currency.

From ECB President Mario Draghi to German Finance Minister Wolfgang Schäuble to European Commission President Jean-Claude Juncker – all affirmed that Europe is prepared for a Greek exit.

Their statements over the weekend, delivered separately, sounded like an invocation.

It may just be the new mantra for the old continent.

“A national bankruptcy can hardly be avoided now,” said one euro zone official, who said he was determined to save the euro.

But there is also a palpable sense in Europe that Athens’ tenure in the euro zone is drawing near.

The G7 group of the world’s major industrialized nations held a telephone conference to discuss the situation on Sunday.

Political recrimination dominated the Greek and European airwaves over the weekend as elected officials sought to lay blame for the breakdown in talks with their opponents.

The ECB’s new banking regulator, the Single Supervisory Mechanism, convened, as did the governing council of the ECB. Ms. Merkel summoned all party and parliamentary leaders in Berlin to a meeting at the Chancellery this afternoon.

These meeting are an attempt to get on top of the impending chaos in Greece and the euro zone.

ECB President Draghi will play a key role over whether Greece remains in the euro zone.

Because people have been withdrawing funds from their accounts, Greek banks have only been able to survive with the ECB’s so-called Emergency Liquid Assistance loans. However, on Sunday the ECB Council decided not to increase the current €90 billion package of those loans for Greece. The decision forced the banks to close on Monday – allowing citizens to take out only €60 in cash per day.

According to central bank insiders, the ECB’s form of support had been exhausted, and Greek banks would have had only “limited ability to disburse funds” if they opened their doors today anyway.

With its decision, the ECB had sought to force the Greek government to introduce capital controls, the sources, who declined to be identified, added.

The emergency loans were controversial anyway, especially in Germany, where opponents of further financial aid to Greece have questioned their legality under the ECB charter.

Now that it appears likely that Greece’s aid program with its international creditors will expire on Tuesday night, there is no longer any basis for expanding the ECB aid.

 

varoufakis motorcyle source reuters
Mr. Varoufakis leaving a meeting on Sunday with the Greek Prime Minister, Alexis Tsipras. Source: Reuters

 

As Handelsblatt has learned, capital controls and the closing of Greek banks were already discussed in the Eurogroup meeting of European finance ministers on Saturday.

According to some who attended the meeting, Mr. Draghi stated that the Greek central bank had made all necessary preparations. Greek Prime Minister Alexis Tsipras had continued to reject the measure until he was left with no option late Sunday night.

Dramatic days are ahead for Greece and the euro zone. Europe will ensure that Greece is provided with medical products, food and energy, said one senior EU official.

But after this weekend, no one is willing to offer a guarantee anymore that Greece will remain in the euro zone. Instead, the objective has become to safeguard Europe and the monetary union.

“We are entering new territory,” said an E.U. official with crisis experience.

That uncertainty means strategists in the European governments can only plan on the basis of scenarios now.

And they are contending with two large, unknown variables: How will the financial markets react? And what will the government in Athens do next?

“The first one is perhaps easier to calculate than the second,” said a government official ahead of Monday’s stock market decline.

EU Commissioner Günther Oettinger told Handelsblatt: “There has been growing nervousness in the markets in recent weeks. Still, I don’t believe that other euro countries are seriously in danger. The monetary union is much more stable today than at the beginning of the debt crisis. It has a bailout fund, banking regulation and stricter budget rules. These things have strengthened the markets’ confidence in the euro zone.”

One scenario governments are playing out is that of a national bankruptcy. If the current aid program expires on Tuesday, the roughly €18 billion in funds for Greece that it still contains will also expire.

Athens will be on its own.

“A national bankruptcy can hardly be avoided now,” fear Eurogroup officials.

The question is: When will happen after that?

Greece’s €1.6 billion debt payment to the IMF on Tuesday is unlikely to be met. Officials in Washington said they expect that Athens will not pay up.

This will have no direct consequences, however, as rating agencies have already made it clear that they will not treat Greece’s nonpayment to the IMF as a default.

Still, turmoil is likely to ensue.

The bigger question becomes: How long will the government be able to continue paying pensions and civil servants’ salaries?

But after this weekend, no one is willing to offer a guarantee anymore that Greece will remain in the euro zone. Now the objective is to safeguard Europe and the monetary union.

According to a two-page document the Eurostat statistics agency submitted to European finance ministers on Saturday, the Greek treasury is a black box.

Nevertheless, it is clear the government will eventually run out of money, which is why the Europeans are already preparing humanitarian-style aid programs.

The euro finance ministers had in fact intended to announce a “humanitarian aid package” in their closing statement on Saturday. But the language was deleted at the last minute because, as one attendee said, the group was worried about provoking disaster.

It is clear, however, that the E.U. countries are making preparations to supply Greece with food, energy and medical products, even if the government can no longer pay for them. The money for the program will come from the E.U. budget.

Then there is the scenario of a 180-degree turn: In theory, Prime Minister Tsipras could relent by Tuesday and accept the creditors’ offer, which includes requirements that Greece implement reforms.

According to a representative of the euro zone, the likelihood of this scenario coming true is “less than 1 percent.” Publicly, however, some officials remain more optimistic.

“I haven’t given up all hope. The euro zone and the IMF have made Greece a very generous offer. They have significantly softened the austerity requirements and extended the deadline for reforms. Greece still has the chance to accept. However, they are no longer negotiating at this point,” Mr. Oettinger told Handelsblatt.

There is another scenario that cannot be ruled out: After a week of closed banks and chaotic conditions, an overwhelming majority of Greeks could vote on Sunday in favor of the creditors’ offer of assistance, complete with the required reforms. The Athens government could then apply for a new, third aid program from the European Stability Mechanism.

This may put Chancellor Merkel, a member of the center-right Christian Democratic Union, in a difficult position.

On the one hand, she can hardly ignore the call for help.

On the other hand, officials close to Ms. Merkel say that her confidence in Prime Minister Tsipras has been shattered. The euro countries believe that Mr. Tsipras and his Syriza coalition fundamentally reject the bloc’s rescue methods, including its reform requirements. Officials in Berlin now argue he never wanted an agreement.

In addition, the hurdles for a new bailout program under the ESM would be high. The German parliament, the Bundestag, would have to approve of the measure before Finance Minister Schäuble could even enter into negotiations.

After the past few months, it will likely be difficult to secure support for a program among German conservatives – unless Mr. Tsipras fundamentally reshapes his government after the referendum.

Then, there is the Grexit scenario: If the majority of Greeks heed Mr. Tsipras’ recommendation and vote no, another aid program will be off the table once and for all.

A final possibility is that Mr. Tsipras will cancel the referendum because he fears defeat.

Either way, the Europeans want to try to keep Greece in the euro zone for as long as possible. To that end, the Athens government is not just being offered emergency aid in the event of a default, but also expert advice from the European Union, the ECB and the IMF.

However, European officials also admit that it will be extremely difficult to stabilize the country within the euro. In fact, the government will likely be forced to introduce a parallel currency after the impending national bankruptcy, so that it can pay retirees and government employees.

It would be the first step back to the drachma.

But would an exit also be better for Greece? The country could then devalue its currency and become competitive again. E.U. Commissioner Oettinger even held out the possibility that Greece could return to the currency at a later date.

“The offer to Greece to remain in the euro zone still stands. But the world will not end if that doesn’t succeed. If the country were indeed to withdraw, it could clean up its act within a decade, so that a return to the monetary union would certainly be possible,” he said.

A Grexit would be painful for the euro zone too: If Greece did not repay the European emergency loans, the remaining euro countries would have to step in.

The German finance minister would have to withdraw €53.3 billion from the federal budget, or €670 per German citizen. However, payment of this amount would not be required immediately, because Greece’s repayment of its debt to the euro countries only begins in 2020 and is spread out over the years until 2057.

The fact that repayment of the emergency loans was extended over such a long period of time not only benefits the Greeks, but also their European creditors, in the event of a default. Between 2023 and 2033, for example, the euro countries would have to write off just €5 billion a year, with Germany paying a quarter of the total.

In the ensuing years, the total annual repayments for the euro countries amount to €8 billion, with Germany paying €2 billion a year. Compared to a national budget that is currently at €300 billion and will continue to grow as the economy grows, the finance minister is unlikely to lose any sleep over €2 billion a year.

Kevin O’Brien is the editor in chief of Handelsblatt Global Edition. Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Jens Münchrath, based in Düsseldorf, leads Handelsblatt’s coverage of economics and monetary policy. To contact the authors: obrien@handelsblatt.com, berschens@handelsblatt.comhildebrand@handelsblatt.com and muenchrath@handelsblatt.com

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