Greek Crisis : Seven Days of Uncertainty

Monday, Jun 29 2015 01:32 PM

 

What happens on Monday when the banks open?

The Greek central bank has kept the main banks supplied with euro notes. Most branches that opened on Saturday were able to keep churning out notes with a few exceptions put down to administrative hiccups.

ATMs are also expected to be working on Monday, though it is likely that the long queues in some parts of Athens, Thessaloniki and other cities will have forced some of them to be closed.

Much depends on how united the government remains in the face of a backlash from Brussels, which forced the Papandreou government to abandon a similar referendum in 2011. A Northern Rock-style panic could see billions of euros withdrawn electronically by savers and businesses, as happened last week. This would force the ECB to supply further funds to the Greek central bank to cover the shortfall.

What happens on Tuesday when the current bailout expires?

At this point European Central Bank president Mario Draghi and the Frankfurt-based organisation’s board will need to decide if the decision to hold a referendum warrants an extension of its support.

The ECB has purchased Greek bank assets at a discount to maintain a flow of funds from Frankfurt to Athens. If the ECB freezes the operation, the Greek banks would soon run out of cash, forcing the government to impose capital controls.

Will the ECB maintain its funding operation?

Unlikely. Draghi has already made it known that he wants EU politicians – not the ECB – to decide on the fate of Greece. In the meantime Draghi will keep funds flowing to Athens. However, the agreement by EU finance ministers to cut off funding from Tuesday is expected to force his hand.

What about the repayment of €1.6bn to the IMF?

This payment will be missed. It is made up of three separate debt payments due this month rolled up by Athens and delayed until 30 June. A further delay puts Greece in arrears, the IMF said, but not default. Creditors know that calling repayment delays a default could allow private investors, holding about €100bn of debt, to demand their money back and push the country into bankruptcy.

How will a referendum resolve the matter?

It won’t, unless voters accept the creditors’ terms. A vote to accept their demands will bring forward pension reforms (ending early retirement this week, not over a period of several years), higher VAT rates on medical supplies, catering and purchases made on Greek islands, while abandoning proposals to increase corporation tax rates.

Rejecting the demands will put Syriza back at the negotiating table to repeat its central demand – that expensive short-term loans with the ECB be swapped for cheaper long-term loans with the commission.

Would the creditors back down should voters reject their proposals?

Brussels and the IMF are likely to view the verdict as a preference for life outside the euro, where rules exist to borrow from a central fund and repay according to a negotiated timetable, just as the Irish and Portuguese have done.

The creditors have admitted mistakes in underestimating the damaging effects of previous demands for public spending cuts as the price of bigger loans.

However, it is now the view of most eurozone countries that pension reforms in particular are needed to stabilise Athens’ perilous finances, especially the need to prevent 400,000 people who currently qualify for an early retirement pension being able to somehow get under the wire and claim one.