The International Monetary Fund threatens to declare the default of Greece on the 30th of June if 1,600 million euros maturity debt are not paid, Greece says can not pay unless receives additional resources from its creditors. If the Greek prime minister Alexis Tsipras does not yield the IMF demands a chain of events will trigger the expulsion of Athens from the European Union (Grexit).
On Monday, 30th of june, an “emergency” summit will be held, with the aim of reaching an agreement. Meanwhile, the withdrawal of deposits held by Greek banks has accelerated. Government revenues collapsed, and the prime minister Tsipras and its creditors remain locked without advancing.
How has Greece come to this castling?
Greece joined the European Economic Community in 1981. It was the first country in southern Europe added to the European alliance as Italy (country considered Southern European) was one of the founders of the union. Apparently met all the requirements to join in… but years later it was revealed that public accounts and balances had been manipulated during the transition, which consequently have slowly deteriorated the country’s economy to make it untenable.
Political corruption and the high level of public employees have made Greece one of the least competitive European countries.
German and French banks invested huge amounts of financial resources in Greece during the 90’s and invested heavily in Greek companies and Greek national Debt. Those investments continued until 2010 when the sovereign debt crisis began. The bailout provided to Greece by the Troika (ECB, European Commission and the IMF) was basically given to save the german banks from losing their investments in Greece. The money was not used to help the Greeks, it all went to the financial sector. That is what Alexis Tsipras is demonstrating to the EU members without any success.
What margin is there for Greece if it goes into bankruptcy?
The IMF managing director, Christine Lagarde, has denied to give any more “oxygen” to Greece. The institution will consider the country into bankruptcy if they do not pay. Perhaps the label imposed by Lagarde cause turmoil in financial markets. It could also accelerate the pace of flight of deposits, forcing Athens to impose capital controls to stop the decapitalization of the country.
However, a senior official of the European Union (EU) quoted by Bloomberg says that failure to meet the IMF requirements does not automatically trigger a default on loans from euro members to the Greek economy. So, there is still some scope for Tsipras.
How long will endure Draghi?
The next big question has to do with the time that would last the European Central Bank (ECB) to continue with emergency loans to Greek banks, which would be guaranteed by bonds of a bankrupt government. On friday it has been authorized 3,000 million. On Thursday they gave the green light to 1.100 million. The ECB Council, since february, has been expanding the emergency roof liquidity to the Greek central bank, which has fattened up the current 83,700 million.
Major complications, if Greece fail to agree with the IMF on June 30, will arrive during the summer months. The main disbursements that have to negotiate are expected to take place in July and August. Greece must return acquired Bonds by the ECB with a total value of 6,800 million euros.
Who will push to close the tap?
Even if Mario Draghi, the ECB president, continued funding to Greek banks after the IMF declared the default of the country, the political pressure to close the tap from the European partners will be overwhelming. Probably because the other European countries have fulfilled the agreements adjusting their national deficits and conducting cuts in their health care and social benefits systems.
Some big countries like Germany and France could even force the EU to withdraw funds injections to Greece. Simultaneously, the European civil society seek to contrast these pressures forcing the Community authorities to provide humanitarian assistance while the Greek economy faces the impact of a bankruptcy.
Promissory notes as an alternative currency?
It is unclear for how long can the Greek government be paying the salaries of civil servants, pensions and essential supplies. The Government budget is close to its ceiling without paying the debt. For this reason, Tsipras ordered local councils and any other public bodies to provide all the money they have left to the central bank.
Public providers say they have spent months without getting payed, at some point, the government may have to repay part of their debts in promissory notes. If Tsipras choose this option, the practice would create a parallel currency if those notes begin to be exchanged for goods or euros at a discount to their initial value.
This weekend is crucial to stop the short drift. Greek Prime Minister tries to cut the tension: Tsipras has ensured an agreement on Monday.