Explaining Greece’s Financial Disarray
Stratfor Global Intelligence, March 22, 2015
What are Greece’s immediate financial problems?
Greece is currently dealing with three key problems:
• Liquidity problems. Tax collection is declining, and the European Union and the International Monetary Fund recently warned that Athens failed to meet its primary surplus target for 2014. In recent weeks, EU officials have suggested that Greece may need a third bailout by midyear; several figures have been mentioned recently, but the bailout would probably be around 30 billion to 50 billion euros.
• Substantial debt repayments for the rest of the year. Greece has debt repayments to the IMF between March and July, and to the European Central Bank between July and December. So far, Athens has been repaying its debt to the IMF, but only after tapping the reserves from social security funds, ministries and state-owned companies.
• Bank deposit outflows. Some 20 billion euros have left the Greek banking system since December. The outflows temporarily slowed down after Athens reached an agreement with its lenders on Feb. 20 to extend its bailout program for four months. But on March 18, Greek banks saw deposit outflows of between 300 million and 400 million euros — the highest in a single day since the February agreement — after the head of the Eurogroup, Jeroen Dijsselbloem, suggested that Greece could be forced to implement capital controls.
What does Greece want from its lenders?
Greece is expected to present a more comprehensive list of economic reforms in the coming weeks. After Athens makes its proposals, a special Eurogroup summit will probably be called to debate the situation. Greece has short-term and long-term requests for its lenders:
• Short-term requests: Greece needs money and it needs it as soon as possible. Greece will ask the European Union to release the final tranche of its bailout immediately. Greece will also ask Brussels to authorize Athens to issue a larger amount of treasury bills.
• Long-term requests: By late June, Greece will request a debt swap to reduce its debt burden. The European Union will continue to oppose debt write-downs and will offer longer maturities and lower interest rates. Syriza is likely to abandon its electoral promise and accept this offer, but the key issue in dispute will be the economic reforms linked to the deal.
Could Greece be forced to introduce capital controls?
Brussels does not have the authority to impose capital controls on Greece, but it could back Athens into a corner, leaving no option but to proceed. If deposit flight accelerates, Athens could be forced to introduce capital controls to protect the Greek banking system. So far, Greece’s banks have been kept alive thanks to liquidity assistance from the European Central Bank — through the emergency liquidity assistance (ELA) program. But capital controls could become necessary in the following circumstances:
• The ECB stops providing emergency funding to Greece. If Greece fails to reach an agreement with its lenders, the ECB could stop acting as Greece’s lender of last resort. This would probably generate fears among savers and lead to a run on Greece’s banks, which would force Athens to introduce capital controls and a bank holiday.
• The ECB refuses to raise the limit on its liquidity assistance. The bank is in charge of deciding the amount of money available for Greek banks through the ELA program. If the deposit outflows accelerate and the ELA program is not increased, then Greek banks would not be able to replace the lost deposits with ECB funding. Over the past weeks, the ECB has raised the limit of funds available for Greece, but not as much as Athens wants.