Cutting up rough: How much do Greece and the rest of Europe stand to lose?

Economist
May 26, 2012

It could come sooner; it might well drag out longer; it can still be averted: but the week following the next Greek election on June 17th still looks set to be the time when the euro zone’s debilitating fever peaks, and the patient’s prognosis becomes clear. That election could well produce a government determined to renege on or radically renegotiate the reforms and austerity measures its predecessor committed the country to at the time of the second bail-out, earlier this year. If that happens, the rest of Europe will have to decide whether to be party to those negotiations or to walk away.

If European leaders follow through on their threats to enforce those terms, the flow of bail-out money to the Greek government will stop. Since March Greece has received half of the €145 billion ($185 billion) it is due to get from the European Financial Stability Facility (EFSF), the euro area’s temporary rescue fund, by the end of 2014. And it has received a first payment of €1.6 billion out of a total €28 billion due from the IMF by early 2016.

Although the Greek government is close to running a primary budget surplus (ie, before interest payments) it still needs further official loans to honour obligations due this year, notably redemptions of bonds held by the European Central Bank (ECB), which were excluded from the restructuring in March that slashed the face value of €200 billion of debt held by private bondholders by over half. If the lifeline from the EFSF were cut off by its creditor nations, Greece would be unable to pay those debts. And if the ECB makes it a matter of principle not to lend (or permit the Bank of Greece to lend) to banks against collateral consisting of bonds and guarantees from a government in default, then it in turn would cut Greece off. Greek banks currently rely upon some €130 billion of central-bank funding. Without the ECB money the entire banking system would collapse. If the flow of money was reduced, and the conditions it is lent on tightened, the Greek government might start to issue IOUs to its workers to make up the shortfall. If the flow stopped, leaving the banks no euros to pay out, a new currency would be the only alternative.

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