What happens next in this Greek tragedy?
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WITH TALKS at the Euro-group meeting ending without a deal, there is not much time left for Greece to unlock the last tranche of its bail-out fund, which is set to expire at the end of June.
At the same time, the country has to repay 1.5 billion euros to the International Monetary Fund on June 30. IMF chief Christine Lagarde said Greece would not be given a grace period and if it failed to make a payment, it would immediately be considered in default.
Meanwhile, the risk of capital controls being imposed in Greece is mounting as savers rush to withdraw money from banks. The outflow, totalling about 2 billion euros over the past three days, accelerated rapidly after the collapse of talks with creditors.
To help Greek banks survive the cash outflows, the European Central Bank (ECB) is providing much-needed liquidity through its Emergency Liquidity Assistance programme. If no agreement between Greece and its creditors is struck by the end of this month, it is likely that ECB financing to the Greek banks will be restricted soon afterwards. If that happens, the Greek government will have little choice but to impose capital controls on the banks to prevent them from collapsing.
Capital controls would be detrimental to Greece’s already-weak economy. The measures, which would put caps on cash withdrawals, require official approvals for overseas transfers and prevent cashing of cheques and payments by credit cards, would hurt retail sales, tourism, industry, international trade and virtually every other sector of economic activity. The consequences of imposing capital controls would be, in my view, even worse than the strict reform targets imposed by the creditors.
My baseline view is that the Greek government will be forced to accept the creditors’ terms once the capital controls are set.
Recent polls suggest that the overwhelming majority of the Greek people want to stay in the euro. Thousands of Greeks rallied outside their parliament to urge the government to reach an agreement with its creditors that will keep the country inside Europe’s monetary union.
Even in the worst-case scenario where Greece is forced to leave the currency bloc, the contagion risk is quite limited. Greek government currently has 325 billion euros of debt outstanding. Almost 80 per cent of Greek debt is held by public creditors such as the ECB, the IMF and the European Financial Stability Facility. Only 20 per cent, or 75 billion euros, is held by the private sector. Private holding of Greek sovereign debt is merely 0.2 per cent of total assets in Europe’s banking systems.
Komsorn Prakobphol is head of strategy at the Tisco Economic Strategy Unit. He can be reached via www.tiscowealth.com or [email protected].
