Saturday 16 December 2017

As the crunch deadline looms, which way will the Greeks go?

Greek Prime Minister Alexis Tsipras met European leaders for talks in Brussels but a deal has yet to reach fruition
Greek Prime Minister Alexis Tsipras met European leaders for talks in Brussels but a deal has yet to reach fruition

Matthias Williams

Greece's government is under intense pressure to deliver unpalatable concessions to international creditors to break a four-month debt deadlock and save the country from looming default that could tip it out of the Eurozone.

There has been some speculation of a deal this week at a meeting of Eurozone finance ministers in Luxembourg. The twists and turns this week are likely to dominate the agenda for the coming days. But don't count on a deal being done.

With no sign of a breakthrough after Greek Prime Minister Alexis Tsipras met European leaders for talks in Brussels, here are three scenarios of how the crisis could unfold.

Greece and its creditors play for time with an interim deal after Tsipras makes some face-saving concessions but the two sides leave the most difficult issues such as debt relief, comprehensive reforms and a third bailout programme for later discussion.

The current bailout, which expires at the end of June, would be extended for a few months, or until the end of March next year as Athens has suggested, to give both sides a breathing space for talks.

A deal would have to be struck before Thursday's meeting of Eurozone finance ministers that would have to endorse any disbursal of aid, leaving both sides less than a week to paper over wide differences to avoid a default at the end of the month.

An interim deal may not be enough for lenders to allow Athens to draw the €7.2bn in aid remaining under the second bailout programme that was frozen last year pending a bailout review that was never completed.

But a deal would likely open other ways for Greece to meet a €1.6bn repayment to the International Monetary Fund at the end of June and further debt repayments of about €6.7bn in July and August to the European Central Bank.

A second scenario is that the talks collapse, and Athens defaults. Tsipras's government has made it clear it would prioritise paying wages and pensions over servicing debt, and government officials have said there is not enough money to pay both.

Athens may still be able to use a 30-day grace period allowed under IMF rules before it is formally considered in default. But missing such a payment - after Athens already delayed payments in June to the end of the month - could trigger a chain of unpredictable events in Greece.

The ECB could restrict or halt emergency funding for Greek banks made through the Bank of Greece, probably prompting a run on the lenders and requiring the imposition of capital controls to staunch a huge outflow of euros from the country.

That in turn, would almost certainly precipitate social and political upheaval that could mark the beginning of the end for Tsipras's novice radical leftist-led government.

A default might also open the way for Greece to leave the Eurozone - though analysts say it could theoretically continue in the bloc even after defaulting. If the government runs out of money to pay bills and salaries, for example, it could start issuing IOUs that would circulate alongside the euro as a sort of parallel currency.

None of the creditors wants Greece to become the first country to leave the euro zone, even if the risks of contagion - with the crisis spreading to other weaker euro zone countries - are seen as less severe than in previous years. But senior euro zone officials held their first official discussion of a possible Greek default on Thursday, in a sign the possibility is being taken increasingly seriously, EU sources said.

To avoid running out of cash and precipitating a banking and economic collapse, Tsipras may be forced to make a humiliating about-turn and accept a deal that crosses his "red lines" on avoiding fresh austerity including pension and labour reforms. Scenario three.

That could pave the way for a third bailout package of up to 50 billion euros, on top of two since 2010 that total 240 billion euros, though officials say there is not enough time to agree one before the current bailout expires at end-June. That would inevitably lead to a political and possibly a social backlash in Athens.

There's no easy answer. But we may get one this week.


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