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“Grexit” is the phrase once again on everyone’s lips in Europe.
Even if Greece is able to pay back a €450m loan to the IMF on April 9, it will struggle to make the big repayments due over the next few weeks unless it strikes a deal with its eurozone partners, raising the spectre of default and, ultimately, the departure from the single currency that haunted Europe for much of 2012.
“There is a lot of loose talk, but there are no mechanisms for forcing Greece to exit the euro — and they don’t seem to want to exit voluntarily,” says Benedict James, a partner at Linklaters, a law firm. “What is more likely is that the government will progressively run out of euros.”
Half in, half out
One scenario is that Greece could stay in the euro while being quarantined in a grey area that would test the limits of the single currency rule book. This could see the government imposing capital controls to prevent deposit outflows and issuing IOUs to creditors and civil servants to plug the government’s fiscal hole.
Stoking such concerns are the declining health of the banking system and the public finances. The deposit base of Greece’s lenders has shrunk by €23.6bn, or 14 per cent of the total, since November, according to UBS, the bank, and Greek lenders are increasingly reliant on emergency funding from the European Central Bank.
Meanwhile, tax revenues have been flowing in more slowly than expected. This is forcing Athens to scramble for money as it faces a challenging repayment schedule to its international creditors — a €458m payment is due to the IMF on 9 April — while having to pay pensioners, employees and suppliers.
Analysts note that, in the absence of a continued commitment by international lenders to fund the banks and government, either avenue could lead Greece out of the euro.
But there are intermediate steps the government can take to remain in the single currency without having to cave in to the demands of creditors demanding stringent limits on public spending as well as an array of structural reforms.
Capital controls
One option is the introduction of capital controls to limit the fallout from bank runs and stem money leaving the country. Such controls infringe one of the fundamental pillars of the EU; the free movement of capital, and their use is severely curtailed by the IMF.
Still, EU law allows countries to impose temporary curbs on withdrawals in order to preserve public security. The rescue of Cyprus in 2013, for example, included capital controls.
In the absence of a clear agreement with its eurozone partners and the IMF, Greece could end up in a legal wrangle, with companies and individuals testing the legitimacy of these measures at the European Court of Justice.
On the fiscal front, Greece may soon face a choice between honouring its debt to international creditors and paying suppliers and pensioners.
“Being the chief treasurer of the Greek government must be the toughest job in the world now,” says Reinhard Cluse, Chief Economist for Europe at UBS.
The Greek government can, in principle, decide how to prioritise payments. However, economists warn there are limits to what Athens can do because of the dependence of its banking sector on ECB lending.
“A sovereign is called a sovereign as it can decide who to pay first,” says Guntram Wolff, director of Bruegel, a European think tank. “However, Greece is not completely sovereign, as the ECB has leverage over what the government can do.”
A missed payment to international creditors could also spark panic among depositors. “Any missed payment by the state will lead to an acceleration of outflows. Inevitably, that will lead to a bank run,” says Athanasios Vamvakidis, an economist at Bank of America Merrill Lynch in London. “The government would then have to impose capital controls and call a bank holiday.”
Greece owes you
One way out could be to continue paying the ECB and the IMF while issuing IOUs to settle domestic commitments. “IOUs are not exit,” says Erik Nielsen, chief economist at UniCredit banking group, who adds that California issued IOUs during its own fiscal crisis in 2009 without having to abandon the dollar.
There are two limits to this process. The first is how acceptable these payments would be among suppliers and public sector employees.