The prospect of Greek default and Grexit from the euro currency bloc has never been closer. But a new knight in white armour might just come to Greece’s rescue.
Right now things look grim and Greece looks lonely trying to make books work. In about 24 hours we will know whether Greece, the sick man of Europe, will have the funds to pay back the International Monetary Fund EUR1.5 bn. As of now, Greece can’t pay. And even with emergency liquidity to Greece by the European Central Bank, it is evident the Hellenic Republic as the sovereign is officially known when it borrows on international markets – something it hasn’t properly done in over five years of this crisis – will soon become the “Hell Republic” for global investors. There is also a risk that Greek ally Cyprus might be back on the crisis page two years after a run on its banks.
Wall Street Journal has created a useful guide which shows the relentless stream of paybacks Greece has to make, with EUR2 bn owed to private Treasury bill holders on July 10 and within the same two-week period, a further half a billion euros to the IMF.
Both the 1.5 bn and 0.5 bn loans to Greece are part of the payback of the first-ever bailout of a euro zone nation made back in May 2010 by the Trojka of public creditors which included the IMF.
In all, Greece owes official lenders EUR243 bn.
Whether or not it is legal under Athens’ own constitution to hold what appears to be a fiscal referendum on July 5, Greek premier Alexis Tsipras is “banking” on the right of Greeks to decide their destiny, rather than the “blackmail” of Europe.
Normally, the European Union has been adept at pulling a rabbit out of the hat at the very last minute. The fact that this time might be different is not only a headache for global investors but is also damaging to the future of the euro zone itself.
Stability of the euro is important. But to let Greece walk away from the euro could be a tempting rehearsal for other nations hit by austerity to do the same, either now or at some point in the future.
Nevertheless, it looks like Greece is being pushed out by entrenched views over debt and economic reforms. So who might come to the rescue of the new European paupers?
New international handouts?
So with MSCI threatening today to remove Greece from its emerging markets index if it triggers a Grexit, what would a standalone status mean for the small nation?
A few years ago I wrote a story quoting an official at the International Finance Corp – which supports private sector projects in needy nations – saying that the IFC could intervene to help Greece re-build infrastructure. That was when relations with the EU were far better than today but after the bailout had already begun. The IFC is part of the World Bank Group, along with the IMF and other lenders and public financiers.
Depending on what happens to Greece’s GDP, we might well find a situation where another part of the World Bank steps in. While the IMF might end up licking its wounds over unrepaid debt, if Greek GDP plummets it might be sister group the International Bank for Reconstruction and Development which steps in to fund, or even the International Development Association. After all, the need for wider global financial stability is of far greater importance than the whims of membership of a European rich man’s club.
One other thing looks quite certain too. The chances of a US Fed rate hike as soon as September are slimmer with the Greek crisis – and also the emergency rate cut by China at the weekend. This will be a significant week in geopolitical risks for sure.