Wednesday, June 17, 2015

Default Does Not Equal a Grexit: Get Ready for Additional Acts in the Greek Debt Drama

It appears to me, and what I have said on this page in the past, is that there is no alternative to a Greek default on its debt obligation to the troika -- International Monetary Fund, European Central Bank and the European Commission; either that or a complete about-face by the troika, capitulating on its demands to cut pensions and loosen labor laws. Germany's strict allegiance to austerity, as well as antipathy towards Greece shared by eurozone states Finland, Spain, et al makes a troika capitulation a long shot.

Several stories this morning (James Kanter and Niki Kitsantonis, "Tsipras Attacks Greece’s Creditors as Pressure Grows on Debts"; Peter Eavis, "Greek Exit Would Shake, but Most Likely Not Shatter, Eurozone") sound the alarm on the coming Greek default. The one story that caught my eye though was an AP piece ("Will Greece Leave the Euro? A Look at Its Options") that problematizes the notion of any clear resolution of the Greek debt drama once the country defaults at the end of this month:
Here are some questions and answers on Greece's future. They could come in handy during Thursday's meeting of eurozone finance ministers in Luxembourg.
Technically, it can't. These are uncharted waters. European Union treaties legally allow members to leave the 28-nation EU, but no mechanism was foreseen to let countries leave the euro. Theoretically, if all 19 nations agree that it's time for Greece to go then a "Grexit" could be negotiated. Some argue the country might have to leave the EU altogether to leave the single currency. 
That would be when the European Central Bank decides to cut off emergency credit to Greece's banks, according to Zsolt Darvas, senior fellow at the Breugel think-tank in Brussels. 
That could happen if there is a run on Greek banks — in which case the ECB might not want to risk its money supporting them. Concerns over a run on banks could grow if it becomes clear that Greece will default on its next debt repayment, due June 30.
The ECB could also cut Greek banks loose if the country defaults on debt repayments due to the ECB in July and August. 
Banks would probably have to close for a while and when they reopen, the government would likely put limits on how much money depositors can take out. "People would try to take their money out of the banks. The banks would not be able to pay," Darvas says. "People would try to store their euros at home, not pay taxes, and the whole financial system would come to a halt." 
Apart from pay its debts on time, some experts believe Greece could limit the damage by engineering its departure in secret. A small group of officials could make the exit preparations and then act on them almost immediately. They would inform their eurozone partners just hours before Greece walks out the door, according Roger Bootle, who heads the research analysis group Capital Economics. The public would be the last to know.
Greece could go back to using the drachma or introduce a new currency. Either way, volume is essential, and that implies serious challenges. Iraq faced similar issues when it introduced a new dinar in just three months following the U.S.-led invasion. "You would need a huge volume, very quickly. There's also the transportation that is a very big challenge. A lot of police, troops would be required to attend to the cash needs of a country the size of Greek. Logistically it would be a huge challenge," Darvas says. 
Greece's bills won't go away, and the jury is out on whether they could be converted to a new currency, although Greece would probably try to redenominate and renegotiate the debt. The one advantage in this for Athens is that all kinds of loans would probably be written down by its creditors. But Darvas says that "all of these technical issues can be resolved. The economic costs of a euro exit — GDP fall and the rise in unemployment — will be far higher."
If you are burnt out on following the debt-negotiating drama don't expect any relief come end of the month. I don't think Greece has any intention of exiting the eurozone; if it had, if preparations were being made to issue drachmas, there would be leaks by now. Once Greece defaults, that is when another round of negotiations will get going. The ECB could force Greek banks to collapse by freezing Emergency Liquidity Assistance (ELA). But by making such a move, the troika would lose the political battle; Syriza would be vindicated.

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