Thursday 26 April 2018

The scenarios: What next - IOUs and drachmas or agreement at last?

Greek Prime Minister Alexis Tsipras
Greek Prime Minister Alexis Tsipras

Ben Chu

Scenario 1: Greeks capitulate

Despite Sunday's resounding No vote to the creditors' demands, it is possible that Alexis Tsipras is secretly looking to do a quick deal that resolves the crisis, so he does not become the prime minister to lead his country into the economic agony of a Grexit.

His very late offer to creditors last Tuesday, just hours before the IMF default, to accept the bulk of their austerity demands actually left the two sides tantalisingly close. The creditors could offer the Greeks some token face-saving concessions to enable Mr Tsipras to sell the agreement at home while he agreed to implement their plan. Yesterday's resignation of the rebarbative Greek finance minister Yanis Varoufakis may make the creditors more inclined to play along.

That would mean Athens agreeing to impose more austerity in return for the cash it needs to keep paying public sector workers and to avoid a default on bonds held by the European Central bank on July 20.

Such a deal could mean the reopening of the banks to desperate savers by the end of the month. The problem is that the new austerity is likely to make Greece's recession worse over the next few years - something that could cause a split in Syriza and prompt the fall of the government.

Scenario 2: Creditors capitulate

Greece crashing out of the single currency would represent a shattering blow to the reputation of this generation of European leaders. They are also starting to realise that if Greece does exit the euro, they will be faced with a much bigger default bill than the price of paying for Athens to remain part of the club. It will be hard work justifying that loss to their own taxpayers.

Plus, creditors would need to send large quantities of financial and other forms of aid to Greece in any case if a Grexit occurred (the alternative is a failed state on their doorstep). So the creditors, despite their hardline rhetoric in advance of Sunday's plebiscite, could decide that compromise is the wisest option after all. They could agree to ease the requirement on Greece to run large budget surpluses for the foreseeable future and wipe out the nominal value of the country's debt.

Athens would crow at this victory, but this scenario would enable Europe's leaders to focus on something other than the minutiae of the Greek public finances and labour market.

The major risk of capitulation from the creditors' perspective would be that other insurgent populist parties in Europe - Spain's Podemos, Italy's Five Star movement, France's Front National - could get a big lift from Syriza's victory, creating political upheaval across the continent.

Scenario 3: No one capitulates

The creditors could feel they simply have too much to lose by granting Greece any concessions in the wake of the vote. And the Greeks might decide they have a mandate to hold fast until they get everything they want. The result could be deadlock. The Greek banking system would run out of cash in a matter of weeks if not days, and on July 20 Athens would default on a €3.5bn bond repayment to the ECB.

The ECB, after being given a tacit nod from Angela Merkel and the other eurozone government heads, could cut the emergency funding from the Greek banking system entirely, saying that it cannot lend to an insolvent state without breaking its own constitutional rules. To prevent the four big Greek banks going instantly bust and wiping out the savings of the population, the Athens government would have to nationalise them. It would then probably announce that they are recapitalised with a giant IOU from the Greek state.

As financial panic takes hold, the bust government in Athens also starts issuing IOU notes (instead of euro) to pay public sector workers. These IOUs would say they have a value of one euro each. But they would be exchanged on the black market at perhaps half the value of a euro, signalling a massive devaluation.

Eventually, after a period of social unrest, the Greek government manages to print a large batch of drachma notes, which become the new currency. That would mean Greece effectively leaves the euro. As the social and economic crisis deepens in the transition, Greece could take a shipment of oil from Vladimir Putin's Russia. And, in return, Athens might veto further European Union sanctions against Russia over its aggression in Ukraine, splitting the bloc.

Irish Independent

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