The Financial Times recently discussed the Greek financial situation in “Tsipras Letter Reveals Precariousness of Greece’s Finances”:
“Greek Prime Minister, Alexis Tsipras, wrote a letter to IMF head, Ms. Lagarde, warning that the IMF repayment would be missed unless the European Central Bank immediately raised its curbs on Greece’s ability to issue short-term debt.”
Ohh, like that’s going to work.
Who, in their right mind would lend more money to Greece?
Long-term, short-term, mid-term—Greece cannot, and therefore will not, pay its debts.
“Raising the curbs on Greece’s ability to issue short-term debt” makes about as much sense as Congress passing a law that allows me to fly by flapping my arms. If it were legal for me to fly by flapping my arms, I still couldn’t fly. Even if it’s legal for Greece to sell more short-term debt, who’d be dumb enough to buy it?
“Greece came so close to defaulting on last week’s €750 million repayment to the International Monetary Fund that the Greek prime minister Tsipras warned IMF chief Christine Lagarde he could not pay it without EU aid.
Greece didn’t “come close” to defaulting. Greece did default:
“Last week Greece averted a default on a loan repayment to the IMF only by borrowing money from the IMF to pay the IMF back.”
This default was not averted by Greece paying the money it owed to the IMF. The default was “averted” by the IMF lending more money to Greece, so Greece could appear to have repaid last week’s bill to the IMF.
The government of Greece—which owes a total of about 330 billion euros to its various creditors—couldn’t even repay 750 million euros owed to the IMF.
750 million euros is about two-tenths of one percent of the total 330 billion euros owed. If Greece can’t even repay 0.2% of its debt without assistance, how can anyone believe that Greece will ever repay the other 99.8% of its debt?
The government of Greece is bankrupt.
Last week, the IMF paid Greece’s 750 million euro debt that was due to the IMF in order to “avert” admitting that Greece is bankrupt. The IMF “averted” admitting Greece is bankrupt by lending more IMF funds to a known bankrupt that can’t even pay its existing debts.
Does this make sense except as an act of desperation?
Wouldn’t it have made more sense for the IMF to simply write off the Greek 750 million euro debt? Why go through the preposterous dance of lending another €750 million to Greece so Greece could seemingly repay its existing €750 million debt to the IMF?
The only rational answer would seem to be that, while Greece is happy to admit that it’s bankrupt, the IMF is terrified by that admission.
We’re left to wonder, who is really more threatened by a Greek default? Greece (who couldn’t and didn’t pay its debt to the IMF)? Or the IMF—that paid Greece’s debt to the IMF?
By paying last week’s debt to itself for the Greeks, the IMF merely maintained the illusion that Greece is solvent.
But, obviously, Greece is actually and already bankrupt. All that remains is the public admission of that fact.
“In addition to payments due to the IMF totaling €1.5bn, next month [June] the Greek government has struggled to meet its wage and pension bills, which must be paid at the end of the month.
If Greece couldn’t pay 750 million euros to the IMF this month, how will it pay 1.5 billion euros (twice as much) due to the IMF next month? The IMF can kiss that 1.5 billion bye=bye.
As for the Greek government’s wage and pension bills due in June, that’s where the fun might really start.
Until now, the Greek government’s debt problem was primarily focused on funds owed to foreign governments and foreign banks. The Greek people supported the Greek government’s attempts to reduce or repudiate those foreign debts.
But, within the next few weeks, the Greek government will also have to deal with “wage and pension bills” owed to the Greek people.
The Greek government says it can pay the “wage and pension bills”. Maybe so. But, if the Greek government is fibbing, the Greek government will probably lose much of the Greek people’s support and might even see the onset of riots or revolution.
If the Greek government had to admit in June that it couldn’t even pay the “wage and pension bills” due its own people, at that point the Greek government, IMF and world could no longer deny that Greece was, in fact, bankrupt.
My guess is that the Greek government is much more likely to give a “haircut” to German creditors than to Greek retirees. As with every government, their principle enemy is their own people. The Greek government may be able to rob Germany with impunity, but they don’t dare rob the Greek people without risking retribution—and worse, an open admission of bankruptcy.
The IMF loaned Greece 750 million euros in May to repay the 750 million euros Greece already owed the IMF. Given that the most likely rationale for that loan was to maintain the pretense that Greece is not bankrupt, I’ll bet that the IMF will see to it that the Greek government has enough currency to pay its “wage and pension bills” in June rather than risk admitting that Greece is bankrupt.
“Officials briefed on the talks [at the IMF to resolve the Greek debt issue], warned the IMF board that negotiations on the Greek economic reform package remained so unproductive that the fund could be forced to withhold its €3.6bn portion of the €7.2bn aid tranche.”
“Unproductive” means “unable to squeeze blood out of a stone . . . or cash out of a Greek”.
I.e., the Greek government is so insolvent, it can’t even maintain the illusion of servicing their debts. Greece is so broke they can’t even pretend that they hope to someday repay their debts. Therefore, there’s no sense in the IMF giving Greece another €3.6bn since there’s virtually no hope that it will ever be repaid or even serviced.
‘It’s clear that we are very far from something the IMF will be able to support without fundamentally breaking its own rules,’ said one IMF official briefed on the fund’s board discussion.”
Apparently, the IMF can’t lawfully lend currency to any borrower who has zero probability of repaying the principle or even repaying the interest on the loan. Greece is so far gone, that it may be “illegal” for the IMF to lend currency to Greece.
“According to two officials briefed on the talks, at least one board member raised the possibility of presenting a ‘take it or leave it proposal’ to Greece.”
The Greek government is caught between the rock and the hard place (or, for those of you with a more classical education, “between Scylla and Charybdis”—an idiom from Greek mythology, meaning “having to choose between two evils”). The “rock” is the Greek government’s creditors. The “hard place” is the Greek people. Given that the Greek people are more likely to shoot Greek politicians than are the creditors, the Greek government is more likely to screw over the creditors and try to placate the people.
If so, the Greek government will most likely “leave” whatever the angry IMF might propose and “take” whatever the riotous Greek people demand.
“The idea of a ‘Cyprus-like’ presentation to Greek authorities has gained traction among some eurozone finance ministers, according to one official involved in the talks. The official noted that the recent public backing by Wolfgang Schäuble, Germany’s finance minister, for a Greek referendum fits into such a scheme. Under this scenario, Mr Tsipras would take the bailout ultimatum to a nationwide vote for approval.”
The creditors know that the Greek government was elected on the promise that they’d repudiate virtually all of Greece’s debts to foreign lenders. The creditors know that the Greek government can’t possibly back out of their promise to the Greek people and therefore can’t agree to a “bailout ultimatum” whereby the creditors will lend more currency to Greece, so long as the Greek government subjects the Greek people to more “austerity”.
Therefore, the creditors want to deal directly with the Greek people (rather than the hog-tied Greek government) in a “nationwide vote” in the dim hope that the people will agree to do something the government cannot: accept more austerity in return for more loans.
Of course, if the Greek people agreed to accept more loans and more austerity, it would not only help the creditors to at least maintain the illusion that Greece isn’t bankrupt, it would also let the Greek government off the hook. I.e., the Greek government can’t possibly betray the Greek people by accepting a “bailout ultimatum”—but the Greek people could “betray themselves” by voting to accept a “bailout ultimatum”. If the people committed the “betrayal” in a national referendum, their government could not be held liable.
The idea of a national referendum is a pretty clever proposal. Creditors win. The EU economy wins. The Greek government wins. The only losers will be the Greek people.
But what are the odds that the Greek people are dumb enough to vote Yes for a “bailout ultimatum”?
Pretty close to zero.
That being so, there’ll be no “take it or leave it” “bailout ultimatum” that requires a public referendum in Greece.
“The IMF believes Greek debt needs another haircut but Greece’s creditors (Germany, Finland and other countries) insist there will be no more haircuts.
Greece originally owed €750 billion. That debt was given a €420 billion “haircut” and reduced to the current €330 billion (of which Greece can’t even pay 0.2% on its own).
Now, the IMF wants to reduce the current debt (€330bn) with another “haircut” to, what—€165 billion? But, given that Greece couldn’t even pay €750 million last week, Greece will never be able to pay the remaining €330 billion, or even €20 billion.
Greece, as I’ve written repeatedly, is bankrupt.
For those European bankers and lenders who don’t understand the term “bankrupt,” I suggest that they read the dictionary definition. If they do, they’ll learn that “bankrupt” means the borrower is flat-out busted, penniless, insolvent and unable to pay the principle or the interest on his debt.
What “bankrupt” also means is that those who loaned the remaining €330 billion to Greece are going to lose their assets. They’re going to lose virtually every penny of the €330 billion already loaned to Greece. Plus, they’ll lose virtually every additional penny of any future loans that are extended to Greece.
It’s true that maybe there won’t be any more “haircuts” where the creditors “voluntarily” agree to write off some or all of the remaining €330 billion Greek debt. No matter. There will be a Greek bankruptcy where creditors are forced to write off virtually all of the Greek debt.
What can’t be paid, won’t be paid.
One way or another, Greece’s creditors are going to lose all of the assets they invested in Greece—and they’ll probably be forced to admit that loss pretty soon.
I doubt that the IMF can get away with lending much more currency to Greece to allow Greece to maintain the “extend and pretend” illusion that Greece is solvent for much longer.
Greece is already bankrupt. Right now. It’s not going to become bankrupt someday—it already is.
The IMF, ECB and Greek creditors are desperately pretending that Greece is not bankrupt—but it is.
I’m not convinced that an official, open declaration that Greece is bankrupt will have as many dire consequences as some fear and predict. But whether the fear-mongers are right in warning that a Greek bankruptcy will trigger a global economic depression—or I am, in thinking that a Greek default might not be particularly significant—the truth may be known within the next two months.
The government of Greece is here. It’s bankrupt. Get used to it.