April 16, 2015


Welcome to the Grey Scenario - default inside the eurozone

As time and funds are running out for Greece, the debate focuses on Greek default scenarios. Die Zeit reported that the German government is already working on plans for managing a Greek default inside the eurozone. The article says that the aim is to ensure that the ECB can continue to finance Greek banks despite the government default. For this to happen Greek banks need to be recapitalised well enough to continue to have access to ECB funding. In return, the German government would expect Greece to remain cooperative and implement reforms. In fact any Greek bank recapitalisation with the ESM will involve the Greek government somehow and will have to be approved by several European parliaments. If this fails, a Grexit would be unavoidable, though the EU Commission could still support Greece with aid payments to help with the transition to a new currency, said the article. A spokeswoman from the German finance ministry declined to comment. The FAZ writes that such "grey scenarios" between default and Grexit have been discussed in the troika for some time now. Keep Talking Greece points out that this scenario does not make much sense, since if the Greek government is to comply with a reform agenda, it could have done so without default. Yanis Varoufakis' proposal for a default inside the euozone comes to mind. 

It is not quite as simple as John Cochrane says it is, but he is right nevertheless: there is no reason not to a consider a within-eurozone default for Greece. What he ignores is that the ECB might cut off the Greek banks, and that the Greek central bank cannot simply print euros as much as it likes. A bank crisis could ensue. Any serious discussion of default should explain how this can be prevented. But we agree when Cochrane says:

"Please can we stop passing along this canard -- that Greece defaulting on some of its bonds means that Greece must must change currencies. Greece no more needs to leave the euro zone than it needs to leave the meter zone and recalibrate all its rulers, or than it needs to leave the UTC+2 zone and reset all its clocks to Athens time. When large companies default, they do not need to leave the dollar zone. When cities and even US states default they do not need to leave the dollar zone. A common currency means that sovereigns default just like large financial companies. (Yes, a bit of humor in the last one.)"

Cochrane ends with two points we have also been making. The strong argument for a default-inside-the-eurozone solution is geopolitical. Grexit would destroy the eurozone's character. It might no longer be seen as a monetary union.

To get a sense of proportion: Greek banks hold €15.5bn in bond titles, €9.3bn of which is in short term papers, according to the FAZ. On top of this Greek banks hold about €30bn in state-guaranteed bonds. Against this are only €10.9bn of funds currently available for bank recapitalisation. Of course, there are also different default options, a complete default is only one of them. There is also the question of when exactly a default becomes a fact. @Schuldensuehner quotes S&P saying that missing a payment to official creditor wouldn't trigger selective default rating under S&P rules.

The other news this morning is that S&P downgraded Greece from B- to CCC+, signalling that Greece is vulnerable to a default, as "its solvency hinges increasingly on favourable business, financial, and economic conditions." For S&P the cut-off date is mid-May, if there is no deal by then there will not be enough time for the Greek parliament to enact the conditions of a revised programme and for the Ecofin to approve the tranche payments. 

Wolfgang Schaeuble told the Council on Foreign Relations in New York that nobody expects a deal by next week and that Tsipras' government had destroyed the progress made by previous administrations. He softened his tone later in a Bloomberg interview, saying that the end of the program on June 30 was the only deadline that mattered. Schaeuble ruled out any further concessions, saying it was up to the Greek government now to commit to reforms needed to release the aid. He also dismissed Greek demands for war reparations, saying that a revival of this debate can only raise completely unrealistic hopes with the citizens.

After different government sources were quoted saying that the Greek government is preparing for a default or early elections if there is no deal, it is now the State Minister for Coordinating Government Operations Alekos Flambouraris who goes public calling for a referendum if the coalition is unable to get a deal. The opposition parties New Democracy and Pasok see this as a sign that the government is running out of options.

As for the payment of tax arrears as envisaged in the second bill, this will have to wait another month, as the online platform for actually allowing those payments is not yet operational, Kathimerini reports. The Greek parliament granted a one month extension to Yanis Varoufakis, for the system to start on May 26. On the matter of taxation we also note the latest tax wedge calculations of the OECD, showing that the net tax burden for a family with one earner, at 28.7%, is almost twice as much as the OECD average of 14.8%, Macropolis reports.

Greek Eurosystem funding went up by €2.9bn in March to a total of €107.1bn, writes MacroPolis, after a sharp rise of €16.77bn in February. It contains €38.67bn ECB funding almost entirely against EFSF bonds, plus the ELA. The monthly rise of €2.9bn is almost entirely due to the rise in ELA funds by €2.87bn to a total of €68.51bn, most likely reflecting a deposit outflow of similar size.

Our other stories

Today we also have stories on Draghi’s position on financial stability, and why this might be wrong; a close look at inflation data; and France pushing the budget boundary, again.

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