ANALYSIS - Crunch Time Approaches For Greek Bailout Deal
Andrew Jay Rosenbaum) by Andrew Jay Rosenbaum
ANKARA - How close is Greece to a bailout deal, and what would a Greek default mean?
Credit rating agency Moody's recently said the drawn out negotiations between Athens and its creditors had reached a vital point.
Without deep economic reform or further relief, Moody's said it expected Greece's debt and other financial commitments to become unsustainable. It cut Greece's rating to CAA2 from CAA1, a level it considers puts the country at "substantial risk" of defaulting.
And the outlook is negative, as the Greek government continues to move in the opposite direction to that its European creditors are demanding.
Since Euclid Tsakalotos was put in charge of day-to-day negotiations, Brussels has been dismayed that Athens' negotiating position remains unchanged.
Tsakalotos continues to rule out sales tax hikes and pension cuts and argues that a leftist government cannot change labor laws to make it easier to dismiss workers.
Although there have been reports from sources close to the negotiations that "a deal is close," that is not what Jeroen Dijsselbloem, head of the Eurogroup of 19 member states, says. On Friday, he told the media there was "little chance" of a deal in Monday's talks.
The problem for Greece is that, on Tuesday, it must make a $750 million repayment to the International Monetary Fund and it is not clear that these funds are available.
Should Greece default on this loan the effect on international markets could be devastating, although there is no reason why a default should necessarily lead to a Greek exit from the euro.
The immediate issue from Greece's point of view would be liquidity. The European Central Bank (ECB) would limit any provisions of liquidity, essentially cutting the flow of euros to Greek banks, and the country would have no source of funds. This would most likely lead to capital controls, as was the case in the 2013 crisis in Cyprus.
"Although the likelihood of default and Grexit [Greek exit from the euro] has certainly risen considerably over the past few weeks in both cases, it is wrong to think that one necessarily will follow the other," Danae Kyriakopoulou, a senior economist at the Center for Economics and Business Research in London, said.
"If liquidity can be maintained even in the case of default then this means that Grexit will not follow default."
The danger of a Greek default is not so much to Greece but to the international banking system.
"If a 'Graccident' were to occur, it would be very messy," Mohamed A. El-Erian, chief economic adviser at global money management firm Allianz, said in an interview with the Wall Street Journal in April.
"And the global economy is still too fragile to take a major shock. The good news is that Europe has done a lot to increase its defenses against contagion. But it could still be very dangerous to stumble into an accident."
The problem is that private banks holding Greek debt, Greek securities, and even deposits from private individuals will come under heavy pressure as these assets are revalued. They would need to bolster capital reserves and that would pressure their sustainability, as ECB economist Roberto De Santis explained in a paper last month.
Then there is the fraught question of Greek Target 2 funds, which are the liabilities incurred by the Greek government through the ECB payment system. Greece is reported to have around $100 billion outstanding in T2 funds. What will happen to the payment system if Greece defaults? At the very least, the German government will face embarrassing questions about what happened to these loans.
Economists believe the eurozone is far better placed to withstand any Greek default because the currency bloc has its own bailout fund, support from the ECB and a banking union that can protect banks from the fallout.
What about a Grexit? It isn't even clear that such a thing is possible. It would lead the financial world into "uncharted waters," as ECB Governor Mario Draghi said recently.
Were Greece to abandon the euro and return to the drachma, who would buy the currency? What would happen to all the Greek assets denominated in euros? What would this mean to banks around the world, as well as the international foreign exchange market?
No one knows the answers to these questions. This is why the Greek government has been careful to avoid the subject, repeatedly committing to staying in the eurozone.
This is also why U.S. Treasury Secretary Jacob Lew has been lobbying hard to find a solution to Greece's woes. He issued a statement on April 17 encouraging Dijsselbloem to "continue engagement toward a constructive outcome because not reaching agreement would create immediate hardship for Greece and uncertainties for Europe and the global economy more broadly."
www.aa.com.tr/en
Kaynak: AA
Credit rating agency Moody's recently said the drawn out negotiations between Athens and its creditors had reached a vital point.
Without deep economic reform or further relief, Moody's said it expected Greece's debt and other financial commitments to become unsustainable. It cut Greece's rating to CAA2 from CAA1, a level it considers puts the country at "substantial risk" of defaulting.
And the outlook is negative, as the Greek government continues to move in the opposite direction to that its European creditors are demanding.
Since Euclid Tsakalotos was put in charge of day-to-day negotiations, Brussels has been dismayed that Athens' negotiating position remains unchanged.
Tsakalotos continues to rule out sales tax hikes and pension cuts and argues that a leftist government cannot change labor laws to make it easier to dismiss workers.
Although there have been reports from sources close to the negotiations that "a deal is close," that is not what Jeroen Dijsselbloem, head of the Eurogroup of 19 member states, says. On Friday, he told the media there was "little chance" of a deal in Monday's talks.
The problem for Greece is that, on Tuesday, it must make a $750 million repayment to the International Monetary Fund and it is not clear that these funds are available.
Should Greece default on this loan the effect on international markets could be devastating, although there is no reason why a default should necessarily lead to a Greek exit from the euro.
The immediate issue from Greece's point of view would be liquidity. The European Central Bank (ECB) would limit any provisions of liquidity, essentially cutting the flow of euros to Greek banks, and the country would have no source of funds. This would most likely lead to capital controls, as was the case in the 2013 crisis in Cyprus.
"Although the likelihood of default and Grexit [Greek exit from the euro] has certainly risen considerably over the past few weeks in both cases, it is wrong to think that one necessarily will follow the other," Danae Kyriakopoulou, a senior economist at the Center for Economics and Business Research in London, said.
"If liquidity can be maintained even in the case of default then this means that Grexit will not follow default."
The danger of a Greek default is not so much to Greece but to the international banking system.
"If a 'Graccident' were to occur, it would be very messy," Mohamed A. El-Erian, chief economic adviser at global money management firm Allianz, said in an interview with the Wall Street Journal in April.
"And the global economy is still too fragile to take a major shock. The good news is that Europe has done a lot to increase its defenses against contagion. But it could still be very dangerous to stumble into an accident."
The problem is that private banks holding Greek debt, Greek securities, and even deposits from private individuals will come under heavy pressure as these assets are revalued. They would need to bolster capital reserves and that would pressure their sustainability, as ECB economist Roberto De Santis explained in a paper last month.
Then there is the fraught question of Greek Target 2 funds, which are the liabilities incurred by the Greek government through the ECB payment system. Greece is reported to have around $100 billion outstanding in T2 funds. What will happen to the payment system if Greece defaults? At the very least, the German government will face embarrassing questions about what happened to these loans.
Economists believe the eurozone is far better placed to withstand any Greek default because the currency bloc has its own bailout fund, support from the ECB and a banking union that can protect banks from the fallout.
What about a Grexit? It isn't even clear that such a thing is possible. It would lead the financial world into "uncharted waters," as ECB Governor Mario Draghi said recently.
Were Greece to abandon the euro and return to the drachma, who would buy the currency? What would happen to all the Greek assets denominated in euros? What would this mean to banks around the world, as well as the international foreign exchange market?
No one knows the answers to these questions. This is why the Greek government has been careful to avoid the subject, repeatedly committing to staying in the eurozone.
This is also why U.S. Treasury Secretary Jacob Lew has been lobbying hard to find a solution to Greece's woes. He issued a statement on April 17 encouraging Dijsselbloem to "continue engagement toward a constructive outcome because not reaching agreement would create immediate hardship for Greece and uncertainties for Europe and the global economy more broadly."
www.aa.com.tr/en