Greeks Bearing Debts
Greece and Europe Stumble Towards A Precipice

After dismissing earlier reports as scurrilous rumors, Greek Deputy Prime Minister Yannis Dragasakis openly admitted that snap elections are in fact a possibility if negotiations fail to secure an accord to release bailout funds later this week at the EU summit in Riga. He ruled out his government crossing “red lines that we have set” in negotiations with EU stakeholders, presumably referring to Syriza’s election commitments to roll back austerity measures. EU leaders are frustrated with lack of visible progress on reforming Greece’s pension system and labor market—measures that the previous government agreed to in 2012, but which Syriza seems unwilling to implement. If snap elections are being considered, even “in the backs of our minds” as Dragasakis says, then a meaningful compromise over reforms really may not be achievable.

Does that mean Grexit is inevitable? Wolfgang Münchau of the FT writes that some euro officials think not, and are contemplating various scenarios—like letting Greece default inside the eurozone. Here’s how Münchau says it could work:

[Greece could] default on the IMF and the European Central Bank. The IMF is expecting a series of repayments. The ECB wants its money back in the next few months on debt it holds on its books. Defaulting on the IMF and ECB is the only option that would bring genuine financial relief in the short term. Nobody has ever done that. It might trigger Grexit.

Then again, it might not. Default is not synonymous with exit. There is no EU ruling that says you have to leave the eurozone when you default on your debt. The link between default and exit is indirect; if a country defaults, its defaulting securities are no longer eligible as IOUs for the country’s banks to tender at ECB money auctions. The same applies to any other debt guaranteed by Athens. The Greek banks hold quite a bit of the latter category, and might find it hard to obtain liquidity if their government falters.

So to default “inside the eurozone” one only needs to devise another way to keep the banking system afloat. If someone could concoct a brilliant answer, there would be no need for Grexit.

Therein lies the rub, of course. Keeping the Greek banking system afloat without helping the profligate Greek government still would amount to a kind of partial bailout—something that in today’s political atmosphere would be a hard sell. With euroskeptic parties ascendant across the continent (the True Finns are in negotiations to enter the Finnish government, having come in second place after the winning Centre party in recent elections) and with publics increasingly wary of Greek free-riding in places like Germany, an opaque deal that kicks the can further down the road—a Eurocrat specialty for the past several years running—may prove difficult to pull off.

We will have to see, of course. Maybe these unnamed European officials know something we don’t, or have a spectacularly detailed contingency plan drawn up to navigate what is likely to be a very complicated situation. Or, as Munchau himself despairs, maybe they don’t, and Europe is blindly barreling headlong into what could be a very messy divorce with its Greek partners.

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