It's Saturday Email Time -- Greece and the Eurozone

It's Saturday email bag time -- and Greece is the big topic this week, with comments and questions about what's going on and what will happen. Let's dig into it. ~~~~~ Greece needs to reach a deal with its Eurozone partners by the 24th of April. If there's no deal by then, Greece could default on its loans and be pushed into the exit lane of the Eurozone. We've been through these crises before, but now there's a growing belief that without some sort of deal on Greek reforms, the leftist government will run out of the cash needed to honor its debt interest payments. Greece has to pay an €80 million interest bill to the European Central Bank (ECB) on April 20th and €200 million to the International Monetary Fund (IMF) on May 1st. But, the monster payment causing jitters all over Europe is a €760 million interest payment to the IMF due on May 12th. IMF president Christine Lagarde has insisted that no delay will be permitted, although rumors persist that Greece has asked for one. ~~~~~ Greece is meeting with its creditors - the IMF and other Eurozone countries - in the Latvian capital, Riga, on April 24th, in an attempt to reduce its debt repayments and improve the repayment schedule. The €750 million due to the IMF on May 12th is all but impossible for Greece, according to experts, but the government is trying to make it -- perhaps by making the difficult decision of paying its debts by not funding pensions and public sector salaries. The government denies reports that it has used reserves from the health service to help pay debts. For the populist, left-wing party swept to power by Greek anger at EU-imposed austerity and at Germany, seen as the Alpha wolf at the door, it will be difficult to stop paying salaries and pensions. ~~~~~ Conditions have been made worse by the ongoing uncertainty of reaching a deal between Athens and its lead creditors - the IMF, the Europeann Commission (EC) and the ECB. The creditors are waiting for Greece to make a set of proposals, and Greece seems to be waiting for ideas to come from them. The practical aim of the April 24th talks is to release a €7.2bn bailout tranche. But, even then, Greece might still need a third bailout of more than $10 billion. And if there is no forthcoming Greek reform package -- or one that fails to satisfy the IMF, ECB and EC -- there will be no new cash. It's a dangerous game of chicken being played out in the Eurozone. ~~~~~ To make matters worse, if that were possible, the S&P ratings agency has downgraded Greece's credit rating again. It dropped long and short-term sovereign credit ratings to CCC+/C from B-/B and says its outlook is negative. Financial markets use S&P ratings to set the interest rate at which investors should lend to a country. S&P said the Greek economy had shrunk by 1% in six months, despite the benefits of a lower oil price and a weak Euro : "Greece's solvency hinges increasingly on favourable business, financial, and economic conditions....In our view, these conditions have worsened. Without deep economic reform or further relief, we expect Greece's debt and other financial commitments will be unsustainable." S&P added that Greek government finances, which appeared to be improving last year, have now fallen because of weaker economic activity and rising arrears in tax payments. The worry for Greece is that its collapsing finances could force its creditors to demand further austerity measures. S&P said that economic prospects could deteriorate further unless Greece reached a deal over the next €7.2bn tranche of its bailout loan : "If the stalemate between Greece and its official lenders is not resolved before the middle of May, then there might not be enough time for the Greek parliament to enact whatever conditions are attached to a revised lending program." ~~~~~ And, ever his charming self, German Finance Minister Wolfgang Schaeuble warned this week that an agreement between Athens and its creditors is unlikely to happen any time soon : "Until now, we don't have a solution, and I don't expect to get a solution in the next week." Schaeuble added that Greece would struggle to find creditors outside the EU and IMF. Assuming a rather cynical posture, Schaeuble said Greece would be welcome to try to find investment from Beijing or Moscow, but may have difficulties. His warning came as Greece's borrowing costs jumped from 23.5% to 27% (both are considered impossible to sustain by financial experts). Schaeuble said the Greek government needs to find creditors : "The Europeans have said, OK, we are ready to do it [lend money] until 2020....If you find someone else, whether it's in Beijing, in Moscow, in Washington DC, or in New York, who will lend you money, ok, fine, we would be happy. But it's difficult to find someone who is lending you in this situation amounts [of] €200 billion." He added that Greece must focus on increasing its competitiveness and primary surplus. ~~~~~ So, the question everyone is asking is what if Greece defaults? Greek banks are relying on €74bn in emergency liquidity assistance (ELA) from the ECB to stay liquid. If the government defaults on its loans, it risks having its liquidity life line from the ECB -- which is keeping both the banks and the government afloat -- cut off. A "forced default" -- one in which Greece simply runs out of money and quits paying its bills, including its citizens' pensions -- would create both ferocious political reaction and a downward spiral leading to Greece leaving the Eurozone and perhaps the EU. The signs that Greeks anticipate that this could happen are already evident. Tens of billions of Euros have been withdrawn from private and business accounts and deposits could begin to leave even faster if April 24th comes and goes with no deal. To halt a run on the banks there might be a ban on withdrawals. In fact, Greece's future in the Euro is looking so shaky that UK bookmaker William Hill has stopped taking bets on the chances of a Grexit. After a forced default, Greece would return to the drachma, suffer instant devaluation and inflation and face a banking crisis. International markets could remain closed to it for years, like Argentina in 2002. ~~~~~ Some economists suggest that the best option would be for Greece to go through a "managed default" to get easier, longer terms on debt service payments on its Eurozone loans. Greece would stay in the Eurozone, but with strict capital controls to keep money from flooding out of Greece. One idea, reportedly under consideration in Germany, would be for the ECB to continue funding Greek banks while considering them in default, in return for strict guarantees for structural reform. Default would mean a big loss for the ECB, up to €110 billion for its exposure to banks and €20 bllion used to buy Greek government bonds. As a central bank, the ECB could simply print the money to recapitalize itself -- a result considered out of the question by Germany. ~~~~~ Dear readers, there are also the questions of market contagion and wider political fallout. The EU has put in place mechanisms to isolate the banking difficulties of one member state from the other 27. So fear of contagion spreading from one country's default no longer exists for Eurozone partners such as Germany. But the IMF has ominously warned that "risks and vulnerabilities continue to exist." And, there is also the potential of political repercussions outside Greece. Several governments facing anti-Euro movements will be watching what happens in Greece with a view to their own potential futures. Spain, Portugal and Italy have economies ill-suited to the high-tech manufacturing based German vision of the Eurozone. If Greece can successfully exit the Eurozone in a managed default, these countries' governments might find themselves under serious political pressure to follow the Greek model. Greece, Spain, Portugal and Italy share many characteristics not suited to the Eurozone -- small artisianal industries, some very high-tech but not able to be industrial behemoths; large agricultural sectors whose export cashflows are not competitive with Germany's; and, the need for a more flexible currency to meet economic and export market ups and downs than is possible in the strict Euro regime. Greece and the other southern tier Eurozone countries should never have been admitted to the Eurozone. They will eventually either follow Greece -- or Eurozone rules will be adapted to accommodate their particular needs. As for Greece, it is hard to imagine that Germany will risk bringing down the Euro just to show Greece who's boss. Look for a deal - perhaps not by April 24th, but soon. It will contain stretched-out Greek debt repayment schedules in return for Greek commitments to restructuring programs that don't severely impact Greek citizens. ~~~~~ (I love getting your emails -- send them anytime to casey.popshots@yahoo.com)