Greece bailout on knife-edge after EU cancels summit amid acrimony

European finance ministers meet again on Sunday to try and thrash out at least a short-term finance deal with Greece

By

Neil Behrmannbtworld@sph.com.sg

Hopes for a Greek bailout and an end to the euro crisis are hanging on a thin thread. 

PHOTO: AFP

JUL 13, 20155:50 AM

London

HOPES for a Greek bailout and an end to the euro crisis are hanging on a thin thread.

Such has been the acrimony between French and Italian supporters of the Greece bailout proposal and angry sceptics, notably the German, Finnish, Slovakian and several other eurozone delegations, that a Sunday summit of European Union (EU) leaders was cancelled.

After arguing for nine hours on Saturday, European finance ministers met again on Sunday to see if they could thrash out at least a short-term finance deal with Greece. Regardless what they decide, German, Finnish, Slovakian and other parliaments must approve any deals. 

The German press leaked a German government plan to negotiate a temporary five-year euro exit, providing Greece with humanitarian aid should no deal be forthcoming.

According to the leaks, the German Finance Ministry, reportedly with Chancellor Angela Merkel's reluctant agreement, proposes that Greece must provide collateral if it wants a further 54 billion-euro (S$81 billion) bailout to remain in the euro.

Brussels should also send in officials and experts to manage the nation's public administration.

 It would be surprising, however, if Greece accepts such a proposal.

Under its own regulations, the European Central Bank (ECB) cannot provide Greek banks with more finance. If ECB president Mario Draghi and his board decide to print more money to finance Greek banks, they would be breaking the rules of the central bank and the eurozone monetary system.

The Greek banks, and hence the nation's economy, are now in a critical position with estimates that they have less than half a billion euros to provide 69 euros a day to individuals and emergency finance for medical supplies and hospitals.

The reverberations from a Greek banking collapse would hurt depositors of  Greek satellite banks in Cyprus, Bulgaria, Slovenia and Romania, bankers warn.

The message from the Greek government is that capital controls could remain for months regardless whether a deal is forged with Greece's creditors. Discussions are expected on Monday on recapitalisation of Greek banks via mergers or the creation of a "bad bank" for bad loans. The model could be Cyprus which had capital controls for two years after its own crisis a few years ago.

Events are now moving so fast that it is difficult to forecast the scenarios of Greece; whether it will remain within the eurozone with a dual domestic euro currency subject to capital controls or forced out of the eurozone with its own devalued currency, eg, the drachma. With this in mind, it is best to consider the facts.

• Greece owes 324 billion euros to a "Troika" of creditors, notably the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF). This debt, prior to the further contraction of tourism and other industries following a run and ultimate closure of banks, was a whopping 177 per cent of gross domestic product (GDP).
• Over and above the 324 billion euros, the ECB has provided Greek banks with emergency lending to keep them afloat. The official figure is 89 billion euros. But with other short-term loans, bankers' estimates raise the exposure to 110 billion to 130 billion euros. Greece defaulted on repayment of 1.54 billion euros to the IMF on June 30, and without assistance is more than likely to default on a July 20 deadline on repayment of 3.5 billion euros of ECB bonds.
• Premier Alexis Tsipras of the left- wing coalition Syriza government rejected a previous creditor deal for pension cuts, sales and corporate tax increases and other austerity measures and held a referendum to back his policy. He was supported by 61 per cent of voters.
• Despite an overwhelming "No" to austerity, Mr Tsipras with the help of French Treasury officials issued a package proposal to his creditors with similar austerity measures. Mr Tsipras and his Syriza government have thus reneged on their promise to the Greek electorate. His defence is that the proposal was needed to obtain a further 54 billion-euro bailout package.
• Not surprisingly Germany and other sceptical nations find the Greek government's proposals as "untrustworthy", firstly because former Syriza reform promises were not met and secondly because of the broken promise to the electorate
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