Grexit: Not Again!

Once again, Greece is back in the news following a fallout between European governments and the International Monetary Fund (IMF) over how to handle the on-going bailout of the country. According to the IMF, Greece needs to be cut a bit of slack on its punitive debt repayment schedule before more funds are released. According to leaders of the Eurozone, Greece is a total basket case and needs to sharp wrap on the knuckles and a withdrawal of any further funding. With a major part of the bailout coming up, tensions are starting to mount over whether the two sides can come to an agreement before time runs out.

For many years, the IMF has held the view that Greece needs significant debt relief to create a sustainable financial situation. During its latest annual report on the Greek economy, the fund is quoted as denying that Greece can grow out of its debt problem. The trouble is, Eurozone governments have already provided debt relief in the form of lower interest rates and extensions to the agreed repayment schedule. Several of these countries are facing serious domestic challenges to what is starting to be viewed as a bottomless pit of financial spending; after all, why should a non-Greek taxpayer be funding the pension/hospital/schooling of a Greek citizen?

Way back in 2015, I wrote an article about a similar situation arising in negotiations between Greece and the Eurozone. To provide some context, Eurozone countries were starting to resist the on-going bailouts being given to Greece; after much to-ing and fro-ing, the two sides came to an agreement which broadly mirrored the one which had originally been in place. Since then, Greece has continued absorbing huge amounts of cash and their economy has largely stagnated; in short, the issues that the money was there to fix seems to have persisted and once again, the Eurozone is fed up of handing over vast quantities of cash for what they see as Greek profligacy.

Not unfairly, many Eurozone countries are concerned that providing further debt relief is simply kicking the can down the road. By weakening the repayment schedule further, Eurozone governments remove the pressure on Greece to deliver difficult reforms and makes it less likely that the country will ever stand on its own two feet. Alongside this, the IMF itself appears to be lacking unity in its views on the matter. Alongside the annual report published by the fund, a set of minutes are also published which detail a summary of the Board’s discussions. According to recent minutes, most directors believe there is a need for further debt relief. This phrase most directors is repeated multiple times throughout the minutes, indicating that there is a lack of consensus within the board about the best way forward.

Another problem lies in the assertion that Greece needs a ten-billion-euro capital buffer to cover any further bailout support; according to the Greeks, this is totally unjustified. If you ask the IMF, these funds are needed to mitigate remaining risks in the Greek banking system and provide a level of cover against a ‘bleak’ prospect for their economy. Despite two prior bailouts (yes we’re now on the third!), totalling around 43 billion euros, Greek banks continue to hold relatively high levels of risky debts which have the potential to become non-performing. The IMF claim that these loans are a significant risk to the Greek economy (and consequently their ability to continue debt repayments). In order to protect against this risk, a capital buffer is required, much in the same way that if you take out a loan, the lender might ask you for collateral.

Until the IMF and Greece come to an agreement over this, the IMF is unlikely to lend positive support to the third bailout. Without that support, the Eurozone governments are unlikely to commit to releasing further funding and without that funding, Greece is out of money…again.

Conclusion: When is crunch time?

As of the date of writing this article, we’re still a way off the pivotal moment when the cash is to be released. That’s later in 2017, in July. To make debt repayments to creditors, Greece will need the next payment of its latest bailout. Until the ‘Troika’ (IMF, European Commission and European Central Bank) carries out their review, and the IMF and Greece come to an agreement over Greece’s capital buffer, that payment won’t be released. The review is now on hold, as Greece has been unable to convince the Troika that it has made significant enough progress to support long-term economic growth and stabilise government finances.

Ultimately, the IMF is not the one funding this bailout. Although highly respected by the Eurozone, its role in this situation is simply to provide advice; their financial backing ended after the second bailout. But if these parties cannot come together, Greece will topple off the knife-edge it’s been balancing on for the last ten years – with catastrophic effects.

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