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BY SHAVASB BOHDJALIAN
Greeks have lost their stomach for austerity and the rest of the euro zone has lost its patience with Athens’ broken promises, an analyst told the Wall Street Journal last week summing up the mood in Europe but this does not mean that Greece will exit the eurozone or that the EU will kick the country out of the euro. More likely, the two sides are preparing for a new round of tough negotiations, which eventually will be in the best interests of both sides.
With deposits falling, Greek banks become even more dependent on the European Central Bank to meet their funding needs, exposing the central bank to potentially huge losses if Greece leaves the euro area. In the past two years, deposit outflows have generally averaged between EUR2 bln and EUR3 bln a month, though in January they topped EUR5 bln.
Total borrowing from the ECB accounts for more than one-half of Greece's gross domestic product. If Greece installs an anti-bailout government that reneges on its austerity promises, it would almost certainly be cut off from ECB funding. The ECB briefly rejected Greek bonds from its normal refinancing operations earlier this year after Athens was placed in default by major ratings agencies following its private-sector bond restructuring. Greek banks were still eligible for emergency funding.
Euro-zone officials have threatened to withhold rescue funds for Greece if it refuses to cut spending and make other reforms it promised as part of its latest bailout. The result would likely be another default on Greece's bonds, cutting it off from regular ECB funds.
Left-wing Syriza party leader Tsipras has said if he wins the June elections, he will keep Greece in the eurozone, but instead negotiate better repayment terms. His biggest negotiating tool is the fact that Greece’s primary deficit – that’s the government deficit excluding interest payments – will be 1% of gross domestic product in 2012.
It’s the first time in recent history that Greece will achieve such a feat. It’s better than the balances of France, the Netherlands, Spain, Ireland, and Luxembourg, among others. And it’s way down from the 10.4% primary deficit Greece recorded in 2009 – a sign of how much austerity the country has endured over the past three years.
Despite the improvement in state finances, it’s also obvious that Greece cannot pay off the interest on its debt, let alone start making capital repayments. The European Commission projects Greek interest payments, even after the restructuring, will be 6.3% of GDP this year and 6.4% in 2013, easily the biggest interest burden in the 27-nation EU.
With interest payments this large and nominal GDP expected to drop sharply this year and probably next, full repayment is almost certainly impossible. In effect, Tsipras is stating the obvious fact that Greece’s deficit excluding interest payments is small, and its time for more debt forgiveness to allow the country to grow again.
Tsipras said in the interview with the WSJ that, if push comes to shove, Greece can manage on its own. By not paying its debts, the country would have enough cash to pay its workers and retirees, he said. He also proposes cuts in defense spending, cracking down on waste and corruption, and tackling tax evasion by the rich.
Even if Tsipras wins the June 17 elections, I would not panic as it would simply mean the Greek people are sending a new face to negotiate better terms from the rest of Europe. The Troika have invested too much money in Greece to pull the plug now and Greece cannot live without EU support. Eventually the two sides will find a compromise solution and things will hum along until the next crisis hits Portugal or Spain and attention turns elsewhere.
(Shavasb Bohdjalian is a certified Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nomad for listings on the Emerging Companies Market. Eurivex offers complete packages and solutions for all types of listings on the ECM/CSE. The views expressed above are personal and do not bind the company and are subject to change without notice)
