Greece’s Long and Painful Odyssey

by Yannis Palaiologos

Wall Street Journal
April 22, 2015

On April 23, 2010, George Papandreou stood in front of a camera on Kastelorizo, the tiny eastern-Aegean island farthest removed from the Greek mainland. With its idyllic harbor as an incongruous backdrop, he announced that Greece had requested a bailout from the European Union and the International Monetary Fund. It was the beginning of a long and painful odyssey. Five years later, a safe return to the Ithaca of growth, market access and unquestionable eurozone membership is less certain than ever.

A policy disaster of this magnitude was entirely avoidable. In the fateful days leading up to that first bailout, investment bankers from Lazard had prepared a plan for rescheduling Greek debt. But the Papandreou government abandoned that idea under pressure from the European Central Bank, Germany and France, which were afraid of the effects a restructuring would have on the banking system. They insisted instead that Greece commit to repaying its debts in full. The IMF, whose staff saw that a program of harsh fiscal austerity, with no devaluation and no restructuring, was bound to fail, acquiesced.

For a time, the plan appeared to be working. In the initial months after the deal, the Papandreou government was hailed by creditors as a team of committed reformers. Finance Minister George Papaconstantinou received a standing ovation at the fall meetings of the IMF in 2010. But markets panicked after the tone-deaf Deauville agreement, as it raised the specter of the default of advanced economies for the first time in decades. As Ireland requested its own bailout, reforms in Athens stalled.

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What happens when a country defaults?

by Jay Elwes

Prospect
April 22, 2015

Why are we asking this now?

Greece is at risk of defaulting on its debts. It has been funneled huge amounts of money by international organisations such as the IMF, and has borrowed large amounts of money from private investors on international money markets. But the continuing downward trajectory of Greece’s economy and the tough rules that have been imposed on the country by lenders mean that the country is running out of money. In coming weeks Greece faces a number of repayment deadlines as well as a large salary bill for government employees. Analysts suggest that the country will not be able to meet these payments.

What do we mean by “default?”

When a government—or company—is unable to meet debt repayments, then it is said to be in default. In such cases, a one-off failure to make a payment is taken as a sign that the government in question is unable to pay back not only that specific debt, but all other debt. There then follows a complete collapse of market and international economic sentiment towards the defaulting government’s financial position.

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Europe's Collision Course With Greece

by Clive Crook

Bloomberg
April 22, 2015

The brinkmanship over Greece and its debts continues. A meeting of finance ministers in Riga on Friday is likely to pass, like many previous make-or-break moments, without resolution. The European Union isn't deviating, and neither is Athens. Before much longer, though, something really will have to give -- and it seems ever more probable that, when it does, the news will be bad.

Confidence has firmed across Europe that a Greek default won't much harm any other country -- indeed, that the rest of the EU might actually be stronger if the Greeks are taught a lesson. This theory is wrong. If it's pressed into action, Europe will come to repent its biggest miscalculation since the creation of the euro.

EU governments are hardening their insistence on an overt Greek surrender. The terms of the existing bailout program, they say, must be honored in full before talks on a new one can start -- and meanwhile, there'll be no more money. In plain terms, the Syriza government led by Prime Minister Alexis Tsipras must not only break its promise to voters but be seen by all to have broken it.

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European Central Bank Squeezes Greek Banks, Tightening Access to Loans

by Landon Thomas Jr.

New York Times
April 21, 2015

As Greece scrambles to secure a financing deal with Europe before running out of cash, the European Central Bank is tightening the vise on the country’s ailing banks by curtailing access to desperately needed emergency loans.

The European Central Bank is now demanding that the value of the collateral that Greek banks post at their own central bank to secure these loans be reduced by as much as 50 percent, according to people who have been briefed on these discussions but who were not authorized to discuss them publicly.

And, these people say, if the Greek government and Europe remain at an impasse on an agreement about austerity measures, these so-called haircuts could increase further.

The move highlights the hard-line approach taken by the E.C.B. toward Greece as it presses the new government to reach an agreement with its creditors.

With the value of the collateral being reduced so significantly, banks will be hard pressed to obtain the money they need to survive.

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Varoufakis Sees Differences Narrowing in Creditor Talks

by Marcus Bensasson

Bloomberg
April 21, 2015

Greece and its creditors are narrowing their differences as officials on both sides recognize that the best chance for success is an accord that leaves them all somewhat unsatisfied, Finance Minister Yanis Varoufakis said.

“The convergence is absolutely clear,” Varoufakis told reporters in Athens late on Tuesday. Both sides “have invested a huge amount in achieving an agreement, and neither they nor we will let the opportunity slip to arrive at an agreement that’s clearly to the benefit of everyone.”

Greece has been struggling to make progress toward releasing financial aid since striking a deal to extend its bailout program in February. The anti-austerity coalition government has repeatedly expressed confidence that a deal to free bailout disbursements was imminent, only to be refuted by euro area officials seeking concrete steps.

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Mythology that blocks progress in Greece

by Martin Wolf

Financial Times
April 21, 2015

The Greek epic continues. It will not end well if the people involved do not recognise they are clinging on to myths. Here are six, each of which poses intellectual and emotional obstacles to reaching a solution.

A Greek exit would help the eurozone. “Will no one rid me of this turbulent priest?” This is the question Henry II is supposed to have asked about Archbishop Thomas Becket. Wolfgang Schäuble, Germany’s finance minister, must think much the same of his Greek partners. For the English king, however, the gratification of his wish was a disaster. A similar thing is likely to be true if Greece leaves. Yes, if Greece suffered a calamitous aftermath, populist campaigns elsewhere would be less effective. But euro membership would cease to be irrevocable. Each crisis could trigger destabilising speculation.

A Greek exit would help Greece. Many believe a weak new drachma offers a painless path to prosperity. But this is only likely to be true if the economy can easily expand its production of internationally competitive goods and services. Greece cannot. And the immediate consequences are likely to include exchange controls, defaults, a halt to foreign credit, and more political turbulence. Stable money counts for something, particularly in a mismanaged country. Ditching it carries a cost.

It is Greece’s fault. Nobody was forced to lend to Greece. Initially, private lenders were happy to lend to the Greek government on much the same terms as to the German government. Yet the nature of Greek politics, tellingly described in The 13th Labour of Hercules by Yannis Palaiologos , was no secret.

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The IMF's big Greek mistake

by Ashoka Mody

Bruegel
April 21, 2015

The Greek government's mounting financial woes are leading it to contemplate the previously unthinkable: defaulting on a loan from the International Monetary Fund. Instead of demanding repayment and further austerity, the IMF should recognize its responsibility for the country's predicament and forgive much of the debt.

Greece's onerous obligations to the IMF, the European Central Bank and European governments can be traced back to April 2010, when they made a fateful mistake. Instead of allowing Greece to default on its insurmountable debts to private creditors, they chose to lend it the money to pay in full.

At the time, many called for immediately “restructuring” of privately-held debt, thus imposing losses on the banks and investors who had lent money to Greece. Among them were several members of the IMF’s Board and Karl Otto Pohl, a former president of the Bundesbank and a key architect of the euro. The IMF and European authorities responded that restructuring would cause global financial mayhem. As Pohl candidly noted, that was merely a cover for bailing out German and French banks, which had been among the largest enablers of Greek profligacy.

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Greek leaders under fire for ordering councils to hand over cash

by Kerin Hope & Peter Speigel

Financial Times
April 21, 2015

Greece’s anti-austerity government faced the first serious rebellion over its handling of a deepening fiscal crisis after it caved in to international pressure and ordered local authorities to hand over their spare cash.

A group of prominent mayors reacted furiously to the move on Tuesday, which followed repeated demands from Greece’s official creditors, saying it amounted to an illegal seizure of municipal funds by the Syriza-led central government. The mayors said the order by decree violated the constitution and they threatened legal action in Greece’s highest court.

George Kaminis, the non-partisan mayor of Athens, said the order was a blow to the independence of local government and could “asphyxiate” the normal running of the capital. “Apart from the fact that this move is clearly unconstitutional, it takes local authorities by surprise . . . and threatens their capacity to contribute to social cohesion and urban development,” Mr Kaminis told a meeting of EU mayors in Vienna on Tuesday.

The backlash underlines how few palatable options remain open to Athens in its frantic hunt for cash. The government’s defiant stance towards the eurozone has so far proved popular with Greeks. But an opinion poll published on Tuesday showed Syriza’s approval rating fell to 45 per cent from 68 per cent last month.

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ECB Is Studying Curbs on Greek Bank Support

Bloomberg
April 21, 2015

The European Central Bank is studying measures to rein in emergency funding for Greek banks as resistance to further aiding the country’s stricken lenders grows among policy makers, people with knowledge of the discussions said.

ECB staff have proposed increasing the discounts imposed on the securities banks post as collateral when borrowing from the Bank of Greece, the people said, asking not to be named as the matter is private. While adjusting these so-called haircuts hasn’t been formally discussed by the Governing Council, it may be considered if Greece’s leaders fail to quickly convince euro-area finance ministers they can reform their economy and secure bailout funds, one of the people said. Greek bank stocks slid.

Greek lenders are mostly locked out of regular ECB cash tenders while the government, which holds talks with euro-area partners in Riga this week, tussles with its creditors over the much-needed aid payments. Instead, the banks currently have access to about 74 billion euros ($79 billion) of Emergency Liquidity Assistance from their own central bank -- an amount that has been rising and which will be reviewed this week.

There’s “no doubt” that the ECB is losing patience with Greece, said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris. “Greek banks will need more funding before long, so in a way larger haircuts or a lower ELA cap are equivalent.”

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Constancio Says Greek Default Doesn’t Mean Automatic Euro Exit

Bloomberg
April 20, 2015

European Central Bank Vice President Vitor Constancio said Greece might not have to leave the euro even if it defaults on its debt.

“We are convinced in the ECB that there will be no Greek exit,” Constancio said at the European parliament in Brussels on Monday. “The Treaty does not foresee that a country can be formally, legally expelled from the euro. So, if anything, some choice of that nature would have to be taken by the Greek government, not by us.”

The ECB is supporting Greek lenders, and by extension the economy, with emergency liquidity as concern over the government’s negotiating tactics for international aid payments spark deposit outflows. In a sign of the severity of the crisis, the government has issued a decree that forces local governments to transfer cash balances to the central bank.

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Greece Orders Public Entities to Store Cash in Central Bank

Wall Street Journal
April 20, 2015

Greece’s government issued a decree Monday requiring public bodies such as state-owned companies and public pension funds to transfer their cash reserves to the central bank as the country’s cash reserves continue to dry up.

The decree, published in the government gazette late Monday, came as no surprise, the government having telegraphed the move last week. But it still represents evidence of an escalating cash squeeze amid renewed concerns of Greek default.

Greece’s parliament has recently passed a bill allowing the Greek government to borrow funds held by state bodies and social-security funds via repurchase agreements, or repos, and has borrowed money from entities such as the central bank and the country’s job centers.

But this decree makes the transfer of state bodies’ cash reserves to the Bank of Greece compulsory, excluding the country’s social-security funds.

“This practice already exists in several countries of the European Union,” a senior government official said Monday, adding that the state has the ability to borrow cash from state bodies that don’t have an immediate need for it, but for no more than 15 days.

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New Greek Law Could Release Prominent Left-Wing Terrorist

by Stelios Bouras

Wall Street Journal
April 20, 2015

Greek lawmakers approved on Monday a controversial prison ovrehaul that could lead to the early release of a left-wing terrorist convicted of killing U.S. and British officials and which has drawn criticism from the American embassy in Athens.

The law, designed to ease overcrowding in the country’s congested prison system, would abolish Greece’s high-security prisons and allows for the compassionate release of elderly and severely disabled inmates.

Among them is 53 year-old convicted terrorist Savvas Xiros.

Mr. Xiros is serving multiple life sentences for his involvement in Greece’s notorious November 17 terror group. The group, before it was largely disbanded in 2002, is charged with carrying out a string of almost two dozen assassinations in its 23-year history, including the murder of five U.S. embassy officials.

In an unusual step last week, as the legislation was being debated in Greece’s parliament, the U.S. embassy tweeted a tribute to one of the slain officials Mr. Xiros was convicted of killing. It reminded followers of the terrorist’s violent history that included the murder of one other American, a rocket attack on the U.S. embassy, as well as a series of other murders, attempted murders, bombings and robberies.

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Let Greece Stumble Out of the Euro

by Mark Gilbert

Bloomberg
April 20, 2015

As the weeks since the Greek election have rolled into months, the government elected in January seems no closer to resolving the dichotomy between its anti-austerity inclinations and the reforms its creditors demand as the cost of handing over more money. Today's news that the government has seized the cash of the nation's local governments, citing "extremely urgent and unforeseen needs," suggests the money really is running out. And none of the likely scenarios for what happens next seems compatible with Greece staying in the euro.

The hard-to-admit truth is that Greece seems both unwilling and unable to pay the dues that accompany euro membership. By ceding control of its currency, the country has ruled out devaluation as an option to pull its economy out of its tailspin; some clever people are starting to say Greece might be better off on its own.

It's worth recalling how Greece got behind the velvet rope of the euro club in the first place -- by cheating. The country couldn't clear the 3 percent deficit-to-gross-domestic-product ratio to qualify for membership; so it hired Goldman Sachs to do some fancy financial engineering in the derivatives market to manufacture the right number by 1999.

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Greece on the Brink

by Paul Krugman

New York Times
April 20, 2015

“Don’t you think they want us to fail?” That’s the question I kept hearing during a brief but intense visit to Athens. My answer was that there is no “they” — that Greece does not, in fact, face a solid bloc of implacable creditors who would rather see default and exit from the euro than let a leftist government succeed, that there’s more good will on the other side of the table than many Greeks suppose.

But you can understand why Greeks see things that way. And I came away from the visit fearing that Greece and Europe may suffer a terrible accident, an unnecessary rupture that will cast long shadows over the future.

The story so far: At the end of 2009 Greece faced a crisis driven by two factors: High debt, and inflated costs and prices that left the country uncompetitive.

Europe responded with loans that kept the cash flowing, but only on condition that Greece pursue extremely painful policies. These included spending cuts and tax hikes that, if imposed on the United States, would amount to $3 trillion a year. There were also wage cuts on a scale that’s hard to fathom, with average wages down 25 percent from their peak.

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Trial Starts for Members of Neo-Fascist Golden Dawn Party in Greece

by Niki Kitsantonis

New York Times
April 20, 2015

In Greece’s most high-profile political trial in decades, members of the neo-fascist party Golden Dawn appeared in a Greek court on Monday on charges including membership in a criminal organization and murder.

The trial will determine the fate of Golden Dawn, the third-largest party in Greece’s Parliament. The overtly racist group was catapulted from obscurity into the front lines of Greek politics at the peak of the country’s debt crisis in 2012, railing against austerity and a growing influx of immigrants.

Facing trial are the party’s leader, Nikos Michaloliakos, a 57-year-old dishonored former Greek Army commando, and 68 other people, including the party’s remaining 16 lawmakers as well as supporters and police officers. Most are charged with membership in a criminal organization, with others accused of murder, racist violence and weapons possession. They face long prison terms if convicted. Golden Dawn rejects the charges, saying they are politically motivated.

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11 Acts Toward a Greek Tragedy

by Mohamed A. El-Erian

Bloomberg
April 20, 2015

With negotiations faltering, the rhetoric intensifying and a daunting payment schedule ahead, there is mounting concern that the latest disagreements over Greece may be more than just another stage in the prolonged repeated game involving that country's debt drama.

The worry is that, this time, a ghastly set of circumstances is coming together to form an inevitable reality – that of Greece being ejected from the euro zone (a forced “Grexit”), which wouldn't be caused by a conscious decision, but would be the result of a huge accident (“Graccident").

Here are the 11 things you need to know:

1. What is making this scenario seem more plausible is the simple fact that Greece is rapidly running out of money, a situation so dire that the unthinkable is on the table: a default on obligations to the International Monetary Fund, one of the world’s few preferred creditors.
2. With such an outcome becoming more than just thinkable, the walk away from Greek financial assets has turned into a jog that could be on the verge of turning into a run. Even some of the structural holders of Greek debt, such as foreign subsidiaries of Greek banks, have been exiting their holdings. Meanwhile, withdrawals of bank deposits are probably accelerating, this after large amounts have already fled the Greek banking system.

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Charting Greece's Frightening Future

by Mark Whitehouse

Bloomberg
April 20, 2015

Greece and its creditors would do well to step back and survey the wreckage as they enter yet another week of brinkmanship: Data on capital flows suggest they've undone years of confidence-building in a matter of months.

Haggling over the terms of loans from Germany and other official creditors is bringing Greece ever closer to a worst-case outcome: a default on its debts and possibly its exit from the European Monetary Union. The protracted uncertainty itself is taking a toll. Worried depositors and investors are moving their euros out of Greece to safer places such as Germany, depriving the Greek economy of the private investment it desperately needs to grow.

Data from the Greek central bank, which records each euro that leaves the country as a liability, suggest the capital flight has reached unprecedented proportions. Over the six months through March, about 62 billion euros ($67 billion) were taken out of Greece. That's the equivalent of a quarter of the country's gross domestic product. Here's a chart:

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Greece Flashes Warning Signals About Its Debt

by Landon Thomas Jr.

New York Times
April 19, 2015

By the standards of his frenzied schedule here last week, the meeting on Friday between Yanis Varoufakis, the Greek finance minister, and Lee C. Buchheit, the dean of international debt lawyers, was a quiet one.

There was none of the media scrum that had followed Mr. Varoufakis around town during the semiannual meetings of the International Monetary Fund and World Bank, as he paid calls on the I.M.F. chief, Christine Lagarde; the head of the European Central Bank, Mario Draghi; the United States Treasury secretary, Jacob J. Lew, and even President Obama.

But the get-together with Mr. Buchheit carried critical meaning, according to experts here. After all, it was Mr. Buchheit who helped broker Greece’s most recent debt refinancing, in 2012.

As Greece now gropes for a resolution to its current financial problems, the meeting suggests Athens might still be holding out hope for a restructuring of its debt burden of 303 billion euros, or $327 billion.

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Europe Braces for Messy Greek Endgame

by Simon Nixon

Wall Street Journal
April 19, 2015

It’s still possible that Greece can remain in the eurozone—though that is no longer the base case for many policy makers. At the very least, most fear the situation is going to get much, worse before it gets any better. No one now expects a deal to unlock Greek bailout funding at this week’s meeting of eurozone finance ministers in Riga—originally set as the final deadline for a deal. The new final, final deadline is now said to be a summit on May 11.

But among European politicians and officials gathered in Washington DC last week for the International Monetary Fund’s Spring Meetings, there was little optimism that a deal will be agreed by then.

The two sides are no closer to an agreement than when the Greek government took office almost three months ago. “Nothing, literally nothing has been achieved,” says an official. In fact, it is worse than that: so far, the bulk of Athens’s reform plans would actually cost money or reduce government revenues, according to eurozone officials.

They say that when you add up all the government’s proposals, the budget surplus required under the current program turns into a 10-15% deficit while debt soars far above the 120% of GDP targeted for 2022. There is no way that the eurozone—let alone the IMF—could disburse funds on the basis of such fantastical numbers.

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IMF chief encourages Greece to bring reforms to ‘fruition’

Financial Times
April 19, 2015

Greece’s populist government must set aside politics and bring promised reforms to “fruition” to save its economy and avoid default, the head of the International Monetary Fund has warned ahead of a crucial few weeks of negotiations.

In an interview with the Financial Times, Christine Lagarde said she told Yanis Varoufakis, the Greek finance minister, during a meeting of the IMF/World Bank spring meetings in Washington last week that he needed to accelerate reforms. She warned that patience was running out with the new Syriza government in Athens and that any honeymoon it may have had with its creditors was rapidly coming to a close.

“There has been a huge commitment by the international community, the European partners but also the IMF and the European Central Bank to actually support the Greek economy,” she said.

“What needs to happen now is that the political views need to actually deliver the measures, the tools, the reforms that could actually reach the objectives that have been set between the international community and Greece: restore stability, improve the economy [and] make sure that one of these days Greece re-accesses the financial markets on its own and without support.”

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