It would be funny if it wasn’t so sad for the Greek people. Every week Greek Prime Minister Alexis Tsipras and his Finance Minister Yanis Varoufakis return to the stage with their creditor counterparts to open another act in the Greek drama: Greece and the euro.
Talks collapsed Sunday because the creditors (ECB, IMF, and European Union) wanted Greece to slash pensions to the bone:
“We believe a reduction of pension expenditures of 1 percent of GDP (out of 16 percent) is needed, and that it can be done while protecting the poorest pensioners. We are open to alternative ways for designing both the VAT and the pension reforms, but these alternatives have to add up and deliver the required fiscal adjustment,” writes IMF chief economist Olivier Blanchard.
That sounds easy in theory but is hard to pull off in practice, which is why Greece walked out of the negotiations after 45 minutes.
The next crucial meeting will be on Thursday, when EU finance ministers meet in Luxembourg. At any time, the ECB can withdraw its emergency liquidity assistance (ELA) to Greek banks, currently around $70 billion as Greek people happily keep on withdrawing money from Greek banks at a clip of 600 million euros per day.
For the creditors, a default would be pretty expensive, but could likely be absorbed.
- Greece owes 240 billion euros to the EU, IMF and the ECB
- The ECB is on the hook for about 20 billion euros and another 64 billion euros worth of ELA, which would likely just vanish in accounting nirvana
Greece has different options on the table and some of them don’t look quite so bad, according to Oxford Economics, which looked into past currency union exits.
- It would launch its own “new” drachma currency and devalue 45–85 percent
- It would impose capital controls to take pressure of the banks
- GDP could fall by as much as 10 percent initially
- After burning relations with the official sector, Greece could renegotiate the 55 billion euros worth of private sector debt
- After the initial drop in GDP, the median growth rates of currencies exiting the union is about 2.7 percent in year two
So at the end of the day, with contagion limited and some options on the table for Greece, the curtain on the Greek drama might fall after the final act is completed.