Greece's grand plan: default and stay in the euro
There's a new theory doing the rounds in the "Grexit or no Grexit" debate.
Unlike the widely-held conjecture that a default would lead inexorably to Greece's ejection from the eurozone, analysts and economists now think there are a number of ways the debt-addled country can retain its membership of the euro while stiffing its international lenders.
With the country's bail-out drama continuing into another month, even Berlin has reportedly begun drafting plans to deal with Athens failing to make its obligations without a "Grexit".
A default within the euro is not as unprecedented as it sounds.
Greece effectively defaulted on lenders when it underwent the largest private sector bond restructuring in history in 2012.
In his former life as an academic economist, the country's outspoken finance minister also advocated Greece defaulting on its obligations while remaining in the currency union.
"The actual cost of severing Greece will prove equal to that of dismantling the eurozone itself painfully, slowly, catastrophically," Yanis Varoufakis wrote in his blog in three years ago.
Athens’ Leftist government was elected on a clear mandate to retain the single currency. But faced with a cash crisis that will soon force them to choose between paying public sector workers, rather than the Troika, the prospect of an intra-euro default is now a very real one.
Here's how it all could work.
Greece has 15 separate debt payments to make between now and the end of July, totalling €16.5bn. These include redemption of its short-term government debt (T-bills), paying down IMF loans, and calling-in maturing bonds held by the European Central Bank.
The viability of a default within the euro would depend heavily on which of these payments is not fulfilled, say analysts.
The "most straightforward default event" would be triggered by Greece's failure to redeem government bonds held by the ECB, says Carsten Brzeski, chief economist at ING.
Senior Greek officials have hinted this is in fact their preferred default option, as the ECB has kept the country on a tight leash since Syriza were swept into power at the end of January.
But the threat of a sovereign default would have to wait until July, when €3.5bn of Greek government debt is due to mature. Whether or not the cash-starved government will be able to limp on until then remains in doubt.
Greece's immediate cash crunch comes in the form of payments to its senior creditor - the International Monetary Fund.
With a disbursement of cash looking unlikely until well into May, the most likely date Greece could stall on the Fund is on May 12 when it has to make a €760m loan payment.
But as noted here, missing an IMF payment would not immediately trigger a default scenario. The government would be afforded a 30-day grace period, after which a silent arrears process would kick in and lead to no further disbursement of aid until obligations are met.
However, a failure to pay the IMF on time would immediately call into question Greece's other loans from the European Financial Stability Fund and the ECB.
Whether or not Greece will be considered to be in default on these payments will depend heavily on political sentiment among its creditor partners. There is enough ambiguity in the legal documentation to allow creditors to continue providing emergency assistance to Greece even if it can't fulfill its obligations to the IMF.
The bulk of Greece's upcoming cash crunch - €12bn - is in the form of maturing T-bills.
So far, the liquidity-starved government has managed to rollover this short-term paper with domestic buyers continuing to snap up most of the debt. Foreign appetite has been decidedly muted however. The only notable interest has come from the Chinese who have chipped in with around €200m in recent bond auctions.
Should this continue however, and Athens could well manage to trundle along rolling over the bonds which are being used to pay its monthly social security bills. This makes a default on T-bills unlikely despite the liquidity squeeze, according to analysts at ING.
It's all about the banks
In any possible default scenario, it is the health of the banking system which will determine how close Greece will come to the abyss of a euro exit.
As the largest holders of Greek government debt, the fate of the banks is tied inextricably to the stricken sovereign's finances. Should default ensue, the position taken by the ECB will be the key determining factor in triggering a Grexit.
The central bank, which has been drip feeding emergency cash (ELA) to the country for three months, has already prevented banks from increasing their sovereign debt holdings. The limits on ELA have also been repeatedly hit and now stand at €75.5bn. But any ECB assistance is conditional on Greek banks remaining solvent and having enough collateral to receive the funds.
In the event lenders are left with dud government debt on their balance sheets, the ECB is almost certain to pull the plug.
"The "E" in ELA stands for "emergency", not "eternity"," notes Giles Moec, Europe economist at Bank of America Merrill Lynch.
"It would be difficult for the central bank to look the other way for too long on the solvency issues, but we suggest that there are ways to keep the Greek financial system minimally functional even after a missed payment for some time," adds Mr Moec.
A post-default world
Should Greece fall into arrears, markets will be gripped by chaos. The rush to withdraw money would mean capital controls will quickly become necessary. Enforced bank holidays, deposit withdrawal limits and caps on external transactions would help the government stem the tide of money fleeing the country.
The prospect of such draconian controls has already been touted in the highest echelons of the creditor powers.
ECB vice president Vitor Contancio has said capital controls would not lead ineluctably to the ECB pulling the plug on Greece. Flexibility around collateral rules could also see the ECB continuing to keep banks afloat following a default.
"In theory the ECB could do almost whatever it wants to do in the event of a Greek default," says Mr Brzeski.
With controls in place, the government would have to start issuing IOU's to pay suppliers, salaries and pensions. This paper would effectively take on the role of a parallel scrip currency, say analysts at Citi.
The next crucial job facing the government would be to find the funds to recapitalise the beleaguered banking system and stave off a full-blown financial collapse.
Greece would face no alternative but to turn cap into hand to Europe's creditors, or find themselves a "sugar daddy", notes Mr Brzeski.
Despite courting Russian and Chinese aid, it is highly uncertain either powers would want to pump money into Greece's financial black hole just to prevent its banking system from teetering over the edge.
At this point, politics will likely takeover.
'Playing with fire'
Pushing Greece to default may be the inevitable result of the dangerous brinkmanship on display from both sides.
"It would be playing with fire", says Mr Brzeski. "The creditors think they need to push Greece over the edge, to finally get on top of this. The Greeks are threatening to default because they believe this is the last thing the Europeans want, and they will eventually bow down."
With the creditor powers refusing to blink, falling into arrears may seem the best stick the Leftist government can wield against their paymasters. But defaulting would not prove to be a long-term palliative for Greece.
Athens will still need a new bail-out package at the end of June, further relief on its €320bn debt mountain and a relaxation of its fiscal targets, if it is ever to get its finances back on a stable footing.
Risking political acrimony, a dissenting populace and the prospect of a plebiscite on its euro membership, would leave Greece and the eurozone in truly uncharted territory in a post-default world.
In the more recent words of Mr Varoufakis: "Anyone who pretends they know what would happen the day we'll be pushed over the cliff is talking nonsense".