Forget about preventing default in Greece, control it, says Europe

Greece’s European partners are increasingly skeptical that Athens can avoid default. The highly indebted country is working feverishly to secure a debt write-off to avoid default, but international investors see even that as a default of sorts.

With only weeks to go before a crucial bond repayment date, statements from European leaders reveal a growing mistrust in the Greek political class's ability and willingness to implement deficit cutting measures. Without those measures, Greece will not receive a necessary second bailout from international lenders, and without the bailout, it will likely default when its debt comes due in March. 

According to some analysts, Europe is readying for a Greek bankruptcy. 

“Some of the core economies in the eurozone are taking a much tougher stance on Greece now and seem to be prepared to allow it to default,” says Ben May, European economist at the London-based research consultancy Capital Economics. “Add to that the number of stumbling blocks remaining and there is a real chance Greece could default in March.”

A meeting of eurozone finance ministers scheduled for yesterday, expected to give the go-ahead for Greece’s second bailout in as many years, was cancelled because the government in Athens had not fulfilled a number of conditions imposed by the international creditors, the European Union, and the International Monetary Fund, according to the leader of the Eurogroup, Luxembourg’s Prime Minister Jean-Claude Juncker.

Even after agreeing on a tough austerity package that included €3.3 billion ($4.3 billion) in budget cuts and sparked violent protests throughout the country over the weekend, Greece still had to identify another €325 million ($423 million) in budget cuts. Leaders of the two main parties in the government coalition, George Papandreou of the center-left PASOK and Antonis Samaras of the conservative New Democracy Party, had to give written pledges confirming that they would honor the conditions of the bailout should they win general elections later this year. 

Apparently that has happened now, and a meeting of finance ministers on Feb. 20 is expected to make “all necessary arrangements to release funds” Greece so desperately needs before it has to repay €14.5 billion ($18.9 billion) on March 20, Mr. Juncker said.

'A bottomless pit'

But some of his colleagues are still not convinced.

"When you look at the internal political discussions in Greece and the opinion polls, then you have to ask who will really guarantee after the elections [...] that Greece will stand by what we are now agreeing," German Finance Minister Wolfgang Schäuble told SWR2 radio. “We can help, but we can’t pour money into a bottomless pit.”

The relative calm financial markets have displayed in the face of the growing likelihood of a default seems to hint at a certain level of preparedness among investors. Banks had two years time to reduce their exposure to Greek debt and to boost their capital ratios, thus limiting the damage they would suffer in the case of a Greek default and making markets less volatile. 

Still, a sovereign default of a eurozone member would be an unprecedented event – with a potential domino effect for larger economies also on the euro. On the heels of a Greek default, investors would be more wary of investing in other troubled economies like Spain, Portugal, and Italy.

“There have been lots of sovereign defaults in the past,” says Mr. May. “Some, like Argentina in the 1990s, dragged on for years and had a huge social impact. Other cases, like Uruguay in 2003, managed to return to the markets very quickly. It’s not unusual for a government to restructure its debts. It is unusual though that this is happening in a developed economy that is part of a currency union.”

Because Greece does not control its own currency, it has fewer options for handling the aftermath of a default.

'Blackmailing' Greece

According to Reuters, the Netherlands and Finland share Mr. Schäuble’s concerns and have proposed to postpone any new bailout payments until after general elections have taken place in Greece. 

“The political landscape in Greece is going to be shaken by an earthquake,” says Janis A. Emmanouilidis, senior policy analyst at the Brussels-based European Policy Centre. “The support for some of the established parties like PASOK is evaporating. I think, Mr. Schäuble, who certainly would prefer the technocratic government of [current Prime Minister] Lucas Papademos to stay in power as long as possible, has done himself a disservice and provoked the Greek people.” 

The Greeks took offense at the remarks of the German finance minister. “Who is Mr. Schäuble to insult Greece?” said an indignant Greek President Karolos Papoulias. “Who are the Dutch, who are the Finns?” Finance Minister Evangelos Venizelos complained about dwindling help from the currency union. “There are some in the eurozone who don’t want us any longer,” he said.

But the European Parliament in Strasbourg spoke up in support of Greece. “Greece is being blackmailed by the troika [of EU, IMF and European Central Bank],” said Austrian Hannes Swoboda, leader of the European Social Democrats, in the plenary session on Feb. 15.

Without a large-scale stimulus package, Greece is going to collapse, Mr. Swoboda argued. Daniel Cohn-Bendit, leader of the Greens in the European Parliament, even called the troika a “neo-liberal Taliban” that was demanding cuts in pensions instead of reducing the defense budget.