By John Glover
Greek voters are demanding their leaders
renegotiate the terms of rescue packages that have imposed unprecedented
austerity on the country since 2010. One potential prime minister, Syriza party
leader Alexis Tsipras, has pledged to tear up the EU-led bailout agreement.
With Greece owing a sum roughly equal to Switzerland’s economy, the fallout for taxpayers could be
calamitous if the country walks away.
“Greece has got some strong cards to persuade them to
go easy on austerity,” said John Whittaker, an economist atLancaster
University Management School in England. “Everyone fears a Greek departure from the euro because they’ll lose
money and lose political capital.”
Euro Integration
European governments have poured money into Greece
since its first rescue was agreed in April 2010 in a bid to keep the country in
the euro and prove that monetary union, a symbol of European post-war
integration, is irrevocable.
After receipt of a 7.5 billion-euro tranche in March, Greece now owes other countries more than 80 billion euros in bailout funds. The European Financial Stability Facility said 4.2 billion euros of rescue cash will be disbursed to the nation today.
The ECB also stands to lose much if Greece walks away
from its obligations. First, the central bank bought about 50 billion euros of
the government’s bonds to push down yields and help the nation retain access to
the capital markets.
In addition, the ECB’s so-called Target2 system --
which tallies trade imbalances between the 17 national central banks using the
single currency -- indicates that the Bank of Greece owes its counterparts 104
billion euros, according to Whittaker.
The Athens-based central bank has also issued 18
billion euros more banknotes than the size of its economy would indicate as
Greeks tuck bills under their mattress or spirit them out of the country,
Whittaker said. That would bring Greece’s total liability to the ECB to 172
billion euros.
‘Meaningful Hit’
The ECB “would have to do a capital call on the rest
of the members if there was a default,” said Darren Williams, chief European
economist at AllianceBernstein Holding LP in London, which manages about $420 billion. “It would be a meaningful hit. So, yes,
the Greeks do have some leverage.”
European politicians are openly discussing the possibility
that Greece will leave the euro after voters flocked to anti- bailout parties
in May 6 elections. Five of the seven parties in parliament reject the
packages, with Tsipras condemning them as a “memorandum of barbarity.”
Political parties differ on exactly what terms of the
rescue agreement should be renegotiated. New Democracy and Pasok, which have
alternated power since 1974 and put in place this year’s bailout, are seeking
to ease Greece’s current international-aid obligations.
On the other side of the debate, Tsipras’s Syriza
party wants to renege on all Greece’s bailout commitments. As it stands, the composition of the next
government is far from certain, meaning new elections may be necessary next
month.
Election Risk
“From a political perspective, there is a considerable
risk that a left-leaning coalition is formed at the next election with a more
explicit mandate to reject the EU/IMF program,” Credit Suisse Group AG
economists including London- based Yiagos Alexopolous said in an e-mailed note.
Their main scenario is that a national unity government will be formed that
changes part of the bailout program but keeps its “broad thrust” on track, they
wrote.
Greece also has 143 billion euros of bills and bonds
outstanding, Bloomberg data show, taking total liabilities to 395 billion
euros.
None of the numbers include money owed by private
debtors including banks. Greek lenders, which are locked out of debt markets,
in January borrowed 73.4 billion euros from the ECB to fund their operations,
the Bank of Greece said May 3. Lenders typically use government bonds and bills as collateral when borrowing from
central banks.
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