After the Greeks dramatically walked out of talks in Brussels last Friday and announced a referendum, a question has been posed: how long can Athens survive without support from its creditors before it collapses?
What are the key dates?
June 30: Delayed €1.6bn payment owed to IMF
June 30: €2bn owed to Greek public sector workers and pensioners
July 5: Greek referendum on whether to accept austerity measures
July 20: €3.5bn owed to the European Central Bank
Will Greece run out of cash?
The banks appear to have enough cash to pay €2bn worth of welfare and pension payments this week and a large public sector pay bill. What is less clear is the amount of funds left in the banking sector to repay depositors should a dispute with the EU drag on for several more weeks. Banks have already limited customers to €60-a-day withdrawals. Nobody has yet said how long the banks can keep filling the ATM machines.
Can Greece go bust?
A country is not like a household that has run out of cash and cannot afford to make loan payments. No one is going to come and take the furniture. The worst that can happen is that the Greek central bank is forced to switch to a new currency, most likely at a lower value than the euro.
What about the creditors?
Like a household, the Greeks can work out a debt management plan that schedules payments over several years, probably with a hiatus for a year or two while the country gets its house in order and with a discount on the original sum owed.
It can’t be that simple?
It isn’t. Nobody knows how it will play out. There is no precedent for a country to default on debts and crash out of a currency union that remains intact. Athens could rely on the large number of euros swimming around the economy and the stock of funds sitting inside the banking system to stagger on for several weeks, especially if the ECB maintains a facility for trading euros with domestic banks.
So how long can this go on for?
Several months, if the ECB is helpful. The governing council met on Wednesday. For instance, Montenegro uses euros with the ECB’s blessing, even though it is outside the euro. But there is a problem when the Hellenic central bank cannot repay a €3.5bn loan to the ECB on 20 July. The ECB has already hinted it might demand more collateral from Greek banks for the €89bn of Emergency Liquidity Assistance that have been pumped into the banking system. If there is not enough funds to make the €3.5bn payment, the ECB could switch off access to euros altogether. Without access to euros, Greek banks would struggle to stay open.
Why would the ECB pull the plug?
If the Frankfurt-based bank cannot see a resolution to the dispute between Greece and its creditors, it could consider Greece insolvent and block further access to Greek banks. Athens could be forced to issue IOUs to suppliers and possibly employees and welfare recipients, passing a law forcing businesses to recognise the IOUs as currency. Then it could start printing drachmas.
What do the ratings agencies say?
Moody’s said a default to the ECB was likely to be the final straw. More than the failure to pay debts to the International Monetary Fund or European Financial Stability Fund, it would “imply a material increase in expected losses on privately held debt”.