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With cash running short in Greece the question on many people’s lips is – could Greece default and stay inside the Eurozone? Open Europe’s Raoul Ruparel considers the potential scenarios.
22 April 2015
While default sounds definitive it is rarely so clear cut. Default is often subjective and murky, even more so when it involves different obligations of a sovereign state. Different creditors have different definitions of default, some of which are linked to each other and some of which aren’t. Ultimately, it depends who Greece ‘defaults’ on and whether it eventually makes amends – i.e. is the default temporary or is it a permanent write off. For the purposes of this blog we take ‘default’ at its most basic level – non-payment to creditors.
Verdict: Yes, Greece could probably deal with missing a payment to the IMF in the short term. The exact fallout would depend largely on decisions by the ECB and Eurozone. That said, given the lack of goodwill towards or patience with Greece this would likely only be plausible in the short term.
Verdict: Not an issue in the short term since no payments go to Eurozone and broader debt restructuring rejected. Hard to imagine willingness to keep Greece in if they unilaterally default on existing loans as shown by rejection of restructuring. Some kind of restructuring may be plausible but not in the immediate future.
Verdict: Very unlikely. Defaulting on the ECB would almost certainly mean the end of ELA. Short term stop gaps could keep Greece from crashing out of the Euro but it would need to get ELA turned back on quickly to have any chance of being in a sustainable position. Silver lining of a very dark cloud, it may not trigger cross default on other bonds/liabilities.
Verdict: Not an issue in the short term. Default on holdouts seems to offer little benefit. ECB again would be the crucial deciding factor.
In any scenario, a default or missed payment by Greece would increase animosity between the two sides and put the country’s position in the Euro in jeopardy since it needs further cash from the Eurozone to secure it. That being said, a missed payment to the IMF would probably be manageable from an economic/financial standpoint, though the politics may be different. However, a missed payment to the ECB could well trigger a downward spiral towards Grexit. In all scenarios, the response of the ECB is likely to constitute a key turning point, once again highlighting just how important and political its position has become (intentionally or not).
Ultimately, a temporary missed payment is something which in most scenarios could be managed at a political level (assuming the willingness exists). However, the same cannot be said of a decision to unilateral write off a large amount of the loans. We have to remember that this remains a fundamental goal of the Syriza government and, as we have long argued, it seems likely that Greece will need some debt restructuring for its position to be sustainable. As we warned in 2012 and as the permutations discussed above show, this has been made all the more difficult by the fact the large majority of debt is now held by official creditors.
In the end, this is the elephant in the room amongst all the short term negotiations to keep Greece afloat for the next month or two. This is all just a precursor to the bigger negotiations over how Greece will fund itself once the bailout expires at the end of June. Will such an agreement involve a debt write-down? Will it be another bailout? Will a Syriza-led government agree to the necessary conditions and be able to sell them at home sufficiently to maintain their power? These questions seem gargantuan given that the two sides can’t currently agree on a short term reform list.