With a deal to resurrect its aid-for-reform programme elusive, Greece risks running out of money in the coming weeks, raising the prospect of default and capital controls to contain a run on its banks.
Officials in Athens are optimistic that the European Central Bank will give it extra financial breathing space but unless euro zone ministers reach a firm agreement to release further loans such a move seems highly unlikely, people familiar with the matter said.
That leaves Greek Prime Minister Alexis Tsipras walking a tightrope, with the unappealing choice between not repaying the International Monetary Fund (IMF) 750 million euros on Tuesday or not paying pensioners and civil servants later in the month.
Any non-payment risk destroying ebbing confidence in the leftist Greek government’s ability to manage public finances and accelerating a slow-motion bank run that began last December, with nervous savers withdrawing deposits.
“There is a sense that they will default,” said one European Union official, describing a growing fear among some of his peers in Brussels.
“You will not know if you are in the euro or not,” he said, describing the state of limbo that would follow such an event, with the imposition of controls on cash withdrawals and the movement of capital.
Throughout the debt crisis that began in 2010, negotiations have been fraught right up to and beyond agreed deadlines before a compromise is found to pull back from the brink.
Many European politicians and central bankers have been keen to play down the worst-case scenario, putting on a brave face as negotiations with Tsipras’ leftist government have zigzagged with little progress.
“We will find a solution because Greece belongs in the euro, belongs in Europe,” French Finance Minister Michel Sapin told European Union lawmakers on Thursday.
Such statements do not explicitly preclude a default and the uncertainty that would follow.
Quizzed this month about Greece, ECB Vice President Vitor Constancio took the unusual step of openly talking about the possibility of a default and controls on the movement of money.
Neither event, if they occurred, would result in a country’s expulsion from the currency bloc, he insisted. Others have since echoed those views.
“In an extraordinary situation, each country has to call on exceptional measures,” ECB Executive Board member Yves Mersch said on Thursday, commenting on capital controls.
Default and the emergence of new currencies are among the scenarios that the European Central Bank, the guardian of the 16-year-old euro, has examined closely.
A recent study by one of its economists, Roberto De Santis, concluded that this “does not automatically imply the break-up of the euro”, although it might raise the cost of borrowing for Italy, Spain and France – posing a ‘systemic’ risk. His view is not necessarily that of the ECB.
Some ECB officials fear that Greece could run out of euros and start to pay civil servants with IOUs, creating a virtual second currency, people familiar with the matter told Reuters.
They believe up to 30 percent of Greeks could end up receiving such government IOUs, which would put further pressure on Greek banks as those workers drew on their savings.
Greek banks in turn rely on almost 80 billion euros of emergency central bank funding that other euro zone countries fear the banks may be unable to repay, rebounding on the ECB, of which they are shareholders.
Central bank governors of the 19-nation euro zone discussed the risks in their weekly review of emergency lending in the ECB’s new, glass-walled Frankfurt headquarters on Wednesday.
Frustration simmered and one person with direct knowledge of the meeting described as “intense”, with hawks pressing for tougher collateral conditions for liquidity.
Loss of trust in Greece explains their concern. Many politicians and bankers openly question the ability of Greece’s politicians to deliver on promises.
They have been bemused by Greece’s vague reform plans, in the words of one official, and irritated by haphazard negotiating tactics that some suspect are aimed at achieving debt forgiveness with little or no reform.
Willingness to help Greece further is fading, and could evaporate entirely if it goes it alone with an IOU currency.
This makes it hard for Athens to achieve its short-term goal of getting a 3.5-billion-euro (£2.6 billion) cap lifted on the short-term government debt Greek banks can use as security for funds.
Lifting the limit would allow the government to borrow more from its banks, with the tacit support of the euro zone.
Without a concrete deal among finance ministers, this is unlikely, making non-payment of the IMF a possibility.
Indeed, the ECB may soon move in the opposite direction, reining in emergency funding by tightening collateral standards.
If it missed a payment to the IMF, Greece would have a grace period of 30 days or more to make good on its debt.
But the country’s future, at that stage, would be bleak. Greece has to repay more than 6.5 billion euros in July and August as bonds held by the ECB and other central banks mature.
Source: Reuters (By John O’Donnell, Additional reporting by Frank Siebelt in Frankfurt, George Georgiopoulos in Athens and Reuters bureaux; Editing by Paul Taylor)