Primer and Update on Greece’s Debt Story

Based on the GDP data for 2013, Greece only contributed a measly 1.9% to the $12,749.93B euro zone economy. Wait, what? Only 1.9%? So why is everyone out there so concerned about Greece when it’s contribution to the euro zone economy is, well, very modest?

Have patience, young grasshopper. After all, wisdom comes with age, knowledge, and experience, so stay awhile and listen.

What’s up with Greece and the Euro Zone?

A not so long time ago (2009) in the wake of an event (Great Recession), not quite far, far away…

Greece sent alarm bells ringing when it declared that it was understating its deficits. This sparked concerns over the soundness of Greece’s financial system as well as that of the entire euro zone. Also, several rating agencies immediately began downgrading Greece’s credit rating, discouraging lending institutions from lending to Greece. As a result, Greece began to teeter towards bankruptcy, generating fears that yet another financial crisis will emerge.

In order to prevent this, the Troika (IMF, ECB and European Commission) provided Greece with two bailout programs. Of course the Troika had to get the money for the bailout program from somewhere. In this case, it came from the banks of the other euro zone countries, which now meant that these euro zone countries were exposed to Greece and would be adversely affected if anything bad were to happen to Greece.

So is this exposure the reason why Greece is so important?

Yes and no. “Yes” because the other euro zone countries became ensnared together with Greece, and “no” because this ensnarement only facilitates the true reason why Greece is perceived to be important? And what reason is that you ask?

Fear. Fear is the reason why almost everyone is so fixated on Greece and on avoiding a Greek default. Specifically, fear of a contagion effect and fear that trust in the euro zone financial system will disappear. Ultimately, these two fears boil down to one – fear of another major financial meltdown amidst the signs of a fragile recovery. But are these fears rational? Nobody knows for certain because it’s never happened, and besides, rationality doesn’t really matter when the market is on mass hysteria mode.

What’s the latest update on Greece’s debt payments?

As of Thursday (June 4), Greece managed to delay its debt payment to the IMF which was supposed to be due on Friday (June 5) . In exchange, Greece offered to bundle the four June payments into a €1.6B lump sum, with promises to pay it on June 30.

And it pushed through too. IMF spokesman Gerry Rice had this to say: “Under an Executive Board decision adopted in the late 1970s, country members can ask to bundle together multiple principal payments falling due in a calendar month.”

Yep, the drama continues. And believe it or not, but forex traders seemed to ignore this particular development when it first came out.

What does the market think about a Grexit?

Sentix’s latest eurozone breakup index for Greece went down to 40.7% in May from 48.3% in April due to  several public statements made by Greek officials with regard to Greece’s commitment to stay in the euro zone. This means that less than half (but still a large percentage) of the 1,000+ investors surveyed by Sentix expect a Grexit in the next 12 months.

From the perspective of Greeks, a poll conducted by Alco showed that 45% of Greeks want Greece to have a deal with its creditors, while 75% of Greeks want to stay in the euro zone. So at the moment, the markets don’t really favor a Grexit based on these surveys and polls.

What would happen to Greece if Greece defaults?

It’s difficult to say. Greek officials haven’t really outlined a plan for a Greek default scenario, and all we’ve been hearing from them is how much they need a deal and how much they don’t want to leave the euro zone. The only thing we do know is what the IMF may do to Greece. There is even a process to it, as laid down in the IMF Financial Operations 2014 guideline.

IMF Remedial Measures

IMF Remedial Measures

Too long? Didn’t read?

The gist of it is that Greece is important because the market believes that Greece is important, thanks to the other euro zone countries having Greek exposure due to the Troika’s bailout program. And this nasty combination of euro zone exposure and uncertain Greek finances generates a host of fears, which ultimately boils down to one fear – fear that another financial meltdown will occur.

And in case Greece does default, the process would not be exactly quick, and even gives Greece some breathing space and weeks of leeway to pay up (maybe even months if Greece shows that is willing to cooperate).

Of course, we’re only talking about Greece’s IMF debt here. Remember, Greece also has debts to the European Central Bank and the European Commission. Although it’s all moot since the terms of Greece’s bailout program spells out that a default on the IMF debt is a default to all its other debts.

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  • konstantin

    …very good article, my thanks to the writer…I believe Greece will not get out of EC, mainly due to geopolitical reasons, ie. practically its geographical position, the flirt it has begun with Russia(gas-pipeline to go through Greece), the invitation it has from the BRICS( to join their banking-system)…as well as it occupies the south-east position in NATO, therefore the Obama/USA concerns that a solution must be found soon…even China wants Greece in the EC so that their investment on the Piraeus harbour (so their goods reach Europe) will not go in vain… ps. BTW I am greek and writing from Athens

    • Thanks for checking out my blog and for sharing your thoughts!

      • konstantin

        …you are welcome…the feeling here is that “the decease of Greece. may cure Europe”…eg. see Spain, Italy etc…

        • But aren’t they saying that a Grexit will be bad for everyone involved? I’m wondering if these other debt-ridden nations might soon be forced to exit too and lead to a break up of the euro zone.

          • konstantin

            …Europe will not break up..but to survive it has to adapt to the demands of its people (see, demonstrations in London/Paris/Berlin/Spain/Athens), it is high time that politicians take the decision on behalf of the people who elected them, instead of business men and technocrats that look only at economic-indexes…

  • Thanks for checking out my blog!

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