On the Gredge

The Economist

EVENTUALLY every long-running drama, from “Downton Abbey” to “Dr Who”, feels formulaic. So it is with Greece’s debt saga. For five years it has followed a wearily familiar script of unpayable debts, aborted reforms and 11th-hour compromises that let the country stagger on inside the single currency. That history has lulled many into expecting the usual denouement in the latest wrangling between Greece’s Syriza government and its European creditors. But this is looking ever less likely. Unless Syriza suddenly capitulates—and a meeting of euro-zone finance ministers on April 24th is one of its last chances to do so—Greece will fail to pay its creditors. If that happens, its exit from the euro will be just a step away.

Greece has already restructured its debts once, in 2012. It now owes money mainly to other European governments, the European Central Bank (ECB) and the IMF. These official creditors have slashed interest rates and stretched out maturities, but not enough. With a debt stock of 175% of GDP, Greece will need more relief. Most European politicians quietly accept this. The danger lies in a chaotic default born of brinkmanship. The Greek government has bills to pay and no money to pay them. It is resorting to desperate measures. This week Alexis Tsipras, the prime minister, ordered local-government bodies to move spare cash to the central bank (see article). That might buy a few weeks. But in the end Greece will not be able to pay its pensioners, let alone its creditors, without a deal with its European paymasters that unlocks new loans.

That seems increasingly unlikely, for three reasons. The first is a deep loss of trust on the part of Greece’s creditors. The euro zone has always had only a faint version of the solidarity that characterises a true union. But since Syriza came to power that has been ripped apart. The stunts and stumbles of Greece’s inexperienced government are a factor. But the bigger problem has been Syriza’s unwillingness, or inability, to name, let alone implement, the reforms that it will undertake in return for its next tranche of money. Once Greece’s creditors might have taken general promises; now they want specifics.

Second, Europeans worry less today about the market consequences of Grexit. Thanks to the 2012 restructuring, the direct effects of another Greek default would be easier to handle because Europe’s banks, the weak link in any panic, are now more insulated. As fears of financial contagion have dwindled, so has European creditors’ appetite for compromise.

And third, political constraints on both sides make bargaining hard. Syriza was elected on a promise to halt the endless austerity required by its bail-outs. The government has its own factions to control, among them hard-left MPs unprepared to make concessions on privatisations or pensions. Mr Tsipras might need a referendum or another election to win a mandate to backtrack even if he wanted to. Voters in creditor countries are tired of paying for Greece; politicians in places like Spain that have also been through austerity are hawkish.

Repayments to euro-zone lenders are not due until the 2020s. But if you add all these elements together, it is hard to see how the Greeks can reach a deal that will let them honour their more immediate debts to the IMF and the ECB.

Outward bound

Less clear is whether such a default must lead to euro exit. The two need not go together: Greece defaulted on private-sector creditors in 2012. But stiffing private investors with the support of the euro zone is quite different from unilateral non-payment to official creditors. The decisions of the ECB, which keeps Greece’s banks afloat, would be critical. The ECB does not want to be the actor that precipitates Grexit by withdrawing support; and ratings agencies have helpfully said that a missed payment to an official creditor would not constitute a default. But if the ECB itself were not being paid, that would be a hard line to hold. And non-payment would depress the value of Greek banks’ holdings of short-term government debt and encourage deposit flight. That would leave the banks needing more liquidity support from the ECB just when doubts about their solvency crystallised. The ECB is unlikely to help then.There are ways for Greece to defer disaster. It could save hard currency by issuing scrip, a type of IOU, in lieu of payments to its citizens (see Free exchange). But that would be an open invitation to Greeks to take their remaining euros out of the banks. So the government could impose capital controls. Cyprus has had these for two years without leaving the euro, but that was done in concert with its partners. If Greece ever got to this stage—a parallel currency in circulation, capital controls in place and bail-out cash withheld—the gap between default and exit would be paper-thin.