May 18, 2015
Will Greece Go Bankrupt this Summer?
Atlantic Council’s Montanino faults creditors for not adopting a forward-looking approach in negotiations with Athens
By Ashish Kumar Sen
Greek Prime Minister Alexis Tsipras wants to roll back some reforms implemented by his predecessor arguing that it would boost the GDP. Greece’s creditors say such a move would further undermine Greece’s ability to repay its debts.
“At the end of the day, I stand on the creditors’ side because Greece needs to assure the markets that it is moving on a sustainable path,” said Montanino, Director, Global Business and Economics Program at the Atlantic Council.
“But I don’t stand on the creditors’ side in them having such a short-term approach, instead of trying to build a consensus in Greece for a reform path. I am not so sure that is the right way of approaching this issue,” he added, while advocating for a more forward-looking process.
Greece was forced to tap into an emergency reserve account to meet a May 12 deadline to pay €750 million ($848 million) to the IMF. That was not before Tsipras wrote to IMF Managing Director Christine Lagarde, European Central Bank President Mario Draghi, and European Commission President Jean Claude-Juncker warning them that his government would likely default on the payment.
Greece’s negotiations with its creditors have been deadlocked on multiple issues, including pension reform, deregulations of the labor market, and the rehiring of around 4,000 former civil servants.
A sticking point has been “what is the primary surplus that Greece has to show for 2015, and which are the reforms that it needs to implement,” said Montanino, a former Executive Director of the IMF. “The second part of that question is nonsense because now we are in mid-May and the program ends in June. So you’re asking a country to undertake reforms in one month. That is not possible.”
Juncker, meanwhile, has sought to break the deadlock by proposing a reduction in budget targets, allowing Greece to delay economic reforms, and releasing emergency cash to prevent the country from going bankrupt in the summer.
Greece owes around €2 billion ($2.26 billion) in June and July. If it fails to make these payments “the message that Greece will send to the markets and to the world is that they are running out of cash,” said Montanino.
Montanino spoke in an interview with the New Atlanticist’s Ashish Kumar Sen. Here are excerpts from that interview:
Q: The Greek government last week dipped into its IMF reserves to pay €750 million ($848 million) in debt interest on its existing loans. Is Greece in a position to make a payment of €1.5 billion ($1.7 billion) to the International Monetary Fund in June after paying another round of pensions and salaries at the end of May?
Montanino: Greece paid back the funds this month using its own reserves. This is not unusual, even if it is clear signal that the country has few resources. It shows for sure that there are no resources for future big payments.
Greece owes the IMF around €1.5 billion ($1.7 billion) during the month of June. In July, it will owe €500 million ($566 million). So there are a lot of payments to be made and clearly there is not enough cash. If Greece doesn’t make one of these payments it will be in arrears. Even if this is not a technical default for the markets—the rating agencies have said that since this is an official debt, not a debt traded on the market—the message that Greece will send to the markets and to the world is that they are running out of cash.
Q: The Greek government has been locked in negotiations with the European Union and the IMF over economic reforms. How close are they to breaking that deadlock?
Montanino: It is a very complicated situation. There have been mistakes made on both sides—Greece and the creditors. They are stuck in a very tough negotiation to complete the review of the current program. This process has not been forward looking. Being forward looking means thinking about what to do with Greece in the next ten years, which is not a matter of making payments in June but of trying to figure out a trajectory for a much more sustainable situation.
Q: What issues remain to be resolved?
Montanino: There are a lot. The Greek government wants to push back some reforms implemented by the past government in terms of pensions and public salaries because they consider this as a way to increase internal demand and therefore to increase the GDP. The creditors see this as a way to make the public budget even weaker and therefore undermine Greece’s capacity to pay. This is the deadlock now.
Q: Where do you stand?
Montanino: At the end of the day, I stand on the creditors’ side because Greece needs to assure the markets that it is moving on a sustainable path. But I don’t stand on the creditors’ side in them having such a short-term approach, instead of trying to build a consensus in Greece for a reform path. I am not so sure that is the right way of approaching this issue.
Q: What other issues need to be resolved?
Montanino: The question is what is the primary surplus that Greece has to show for 2015, and which are the reforms that it needs to implement? The second part of that question is nonsense because now we are in mid-May and the program ends in June. So you’re asking a country to undertake reforms in one month. That is not possible.
The creditors clearly need some political commitment from the other side. The Greek government will not be able to do such reforms in one month. That is not the way it works in Greece.
At the end of the day, I think they can agree on a list of things. For example, they can agree on the fact that the government should subscribe to a list of reforms. In a democratic country such as Greece that doesn’t mean those reforms will be immediately implemented. They will have to go through Parliament, legislation regulations to implement the reforms, and administrative changes. It is clearly a political commitment. That’s what the creditors want now.
Q: Has the Tsipras government taken any steps toward reform?
Montanino: Not really. This is a failure for the Greek government and it is also a failure for the creditors. Everybody is talking about a list of reforms, so the negotiation is on what to do next. This negotiation has already taken three months. Instead of actually doing things they are discussing a list of things to do in the future. In the process we have lost three months.
Q: Greece today has asked for a loan deal before the end of May. Is it likely that such a deal will be approved before the Greek government has satisfied the EU and IMF on the question of economic reforms?
Montanino: The likely outcome is you have the Greek government present a list of reforms to be implemented in the future. The creditors then have to agree on that list. There is then a political agreement, and then you have the disbursement of this money.
The disbursement is €7.2 billion ($8.15 billion), which will clearly solve only a very short-term issue that doesn’t even cover the entire year during which time more than €7.2 billion will be owed. It doesn’t solve the long-term issue. In six months we will be at the same stage as we are now.
Q: There are reports today that European Commission President Jean-Claude Juncker has proposed a deal to break the deadlock between Greece and its lenders. What are your thoughts on this deal?
Montanino: Juncker is clearly playing a political game rather than a technical one. There are some differences within the European Commission between the political and the technical levels. The technical level wants to see the numbers to assess the reforms. Juncker has a more political approach.
At this stage it is probably better to follow the political view than the technical one in order to understand whether the political will—not just among the Europeans, but among the Greeks themselves—is to keep Greece from leaving the European Union.
Q: Is the Grexit [Greece’s exit from the European Union] then still on the table?
Montanino: It is on the table because during the negotiation you can have an accident, which means there is no agreement by the end of May. Then you have the payment of €300 million ($339 million) due on June 5. If there is no money, then they can’t pay. I am still confident that they will not reach this point.
Q: Will Greece be forced to leave the European Union if it is unable to repay the money?
Montanino: In order to leave the European Union, you will need the government to call for a referendum. It is quite a complicated legislative process and the EU treaty does not foresee a procedure to just leave the euro.
If Greece doesn’t pay it will open the question of whether you can have a country defaulting into a currency union and how to handle this.
The view of the Europeans is that now is the time for Greece to decide what to do. German Finance Minister Wolfgang Schaeuble came out with a comment on having a referendum in Greece asking the Greek people what they want to do; and if they say they want to stay in the European Union, then the government should behave and commit to all the steps needed to be part of the European Union. At the end of the day, the European Union is a club with rules. If you want to stay in the club you have to follow the rules.
Q: Is a one-off bank deposit levy, as was used in the case of Cyprus, a lifeline option for Greece?
Montanino: It is an option. It can be done in exceptional cases, as was the case for Cyprus, and for a fixed term. If Greece fails to make its payment at the beginning of June and the creditors start seeing capital outflow then they will probably be forced to take some kind of action to avoid a big outflow.
Ashish Kumar Sen is a staff writer at the Atlantic Council.