“If Europe insists on pensions, it will have to accept the award.” By this statement, uttered by midday Wednesday, Greek Prime Minister Alexis Tsipras pretty much sums up the state of negotiations: stalled. Since taking office, his government is trying to renegotiate the financing conditions of Greece to its creditors, the International Monetary Fund (IMF) and the Europeans to save the Greeks new painful budget cuts, as creditors require in exchange for their loans.
In the absence of agreement in the coming days, the country will be unable to repay € 1.6 billion on June 30, the IMF and 3450000000 July 20th and August 20th 3.2 billion to the ECB. A prospect that worries the entire financial world. Christian Parisot, economist at Aurel BGC:
For now, it is a topic of conversation. There are no large movement in the markets. But it’s all or nothing. If Greece fails to the IMF, it will be a first click. “
In recent weeks, as the worst of the sovereign debt crisis, the” Grexit “(the nickname given to the exit of Greece from the euro area) is on everyone’s lips, as well as its cataclysmic consequences. a domino effect that would cause the end of the euro and of the European Union, causing the world economy in its fall The failure of the talks would be “extremely serious for the European project,” warned again Wednesday Finance Minister Michel Sapin. But before signing this Greek tragedy, the Europeans will have to write several chapters.
A small flaw, with a month time
The Greek default to the IMF would not be the end of the end, only its beginning, the rating agency Standard & amp;. Poor’s itself stated that it would not lower the sovereign rating of Greece in “selective default.” No self-fulfilling prophecy this time!
Because since 2012, the Greek government debt, 317 billion euros today – or 170% of GDP anyway! – Is owned by the European public sector:
- 142 billion euros in the European Financial Stability Facility (EFSF),
- € 53 billion directly to European states
- 27 billion to the European Central Bank
- 30 billion to the IMF.
The rest, about 65 billion euros, returns to private, including fifteen billion to companies, banks and Greek insurance.
And when a country defaults to the IMF, its director has a month’s time to notify the council. A month to reach an agreement would trigger a new loan to Greece, and erase the fault to the IMF. “Failure in the IMF will only be technical if there is a political agreement,” said Jesus Castillo at Natixis.
A debt that would widen
If there was still no agreement in late July, however, it would enter a zone of uncertainty. Greece would be excluded from the IMF after two years, but it would lose the aid of the institution. Now she needs it! According to Eric Dor, director of studies at IESEG:
On what it had committed to pay in 2014, it still has 3.6 billion euros to be paid this year and 8.2 billion more planned in 2015 and 2016. “
And that is not all. The EFSF was to pay jointly EUR 1.8 billion. This would seriously fail in Greek pensioners Worse!
In the agreement signed in 2012 by Greece with its creditors, a clause states that in case of default, the EFSF may cancel its next installment but also demand repayment of this it has already loaned him, namely 141.8 billion euros …! “
The heads of states guaranteeing that funds will arrive perhaps justify to their taxpayers, but they will also make do with private investors to whom they financed … All this is possible, provided that the Greek banking system takes the shot. But Greek banks can not finance itself on the financial markets.
The ECB would maintain its umbrella
The future of Greece is also played in Frankfurt. The European Central Bank (ECB) provides funding for Greek banks via emergency loan program (Ela). And falls in the maximum amount each month to offset the lack of liquidity due to capital flight.
Its president, Mario Draghi, has assured that it could maintain the program “as the Greek banks are solvent, “which remains in its discretion, knowing that it depends in particular on the value of Greek bonds they hold. But he also said the decision to disburse new funds should “be taken by elected politicians, not central bankers.”
“If it is not within the ceiling of loan program Emergency explains economist Eric Dor, the Greek banking sector will dry out progressively, especially in a country where cash is used. We must first establish a freeze of funds, so they do not cross borders or restrictions on withdrawals. ” As in Cyprus during the restructuring of its debt.
A new currency appear
Even with the maintenance of the ECB aid program, lack of political decision to Europeans, Greece quickly raise the question of a new currency. Both because it would provide liquidity to the banking sector. But also because the public coffers are empty. In April, the government started to not pay some suppliers, and arrears accumulate. Nobody knows whether the Government will be ability to pay its civil servants end of July
First, the Greek government could find a response. Pay its civil servants with titles due later. Eric Dor explains:
This is what California when it was bankrupt in 2009, she paid teachers with good named IOU (“I Owe You”, “I you must “in French). It is a means to gain time to reach an agreement. The problem is that this is kind of parallel currency. “
If no agreement is reached, Greece would be two currencies in circulation, one of which is less and less present, the euro, and an alternative currency increasingly present. Ultimately, it would, in fact, outside the single currency, while remaining legally in the Eurosystem.
The euro, a currency less credible
If Europeans actaient the Grexit, instability of financial markets that has developed during all these steps would increase at once: the interest rates at which countries such as Italy, Spain, Portugal and Ireland would rise, dégringoleraient budgets.
The ECB would by buying debt of states in order to lower the rates, the European Mechanism stability could use its emergency fund to lend directly to states having difficulty finding affordable financing on the markets. And maybe, for a risk premium, the euro would hold up. But it would raise again the question of investors. The exit of Greece would set a precedent. Christian Parisot warns.
The next time a country is in trouble, the output would be considered as an option “
In other words, throughout the euro area would not be considered Unless a very profound institutional reforms Eric Dor commented:..
Otherwise, the euro would not be a currency but a basket of currencies with a common exchange rate, as it existed previously in Europe. And which are known to be only temporary … “
Donald Hébert
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