Greece – the final furlong beckons

Will Greece repay a cent of its €109 billion bailout?

It has been some time since anyone in financial markets took seriously the concept that Greece might eventually repay its debts.  Outright default was priced in, and the debate moved on to how big the default would be.  The July 21st Greece II bailout agreement envisaged a default equivalent to about 21 per cent for participating bonds, but in fact a default of some 50-70 per cent (if not more) on the whole debt burden – some 170 per cent of GDP – is what will eventually happen.

I haven't ever believed that a single euro cent of the €109 billion agreed in the Greece II bailout would ever change hands.  Greece II was not about providing the Greeks with even more money.  The point of it was to try to secure the final €50 billion of payments from the Greece I bailout of 2010.  Greece was so totally excluded from financial markets, its economy so dire, its society so unwilling to bear the austerity that would be required, that in spring this year the IMF became concerned that Greece would not have sufficient 2012 funding in place to allow the IMF, under its rules, to continue to disburse funds – IMF rules are quite strict, and the IMF has never not been repaid.  It threatened to withhold payments, which would have triggered full-blown Greek default earlier than EU policymakers had hoped.  The Greece II bailout was devised so that EU policymakers could tell the IMF that it had not excuse not to continue to provide the Greece I funding.

Of course, the way it was set up no money was ever likely to change hands.  Before the Greece II bailout agreement, Finland had already passed a law saying it could give no more money to Greece without collateral, and Slovakia (which hadn't even given any money to the Greece I bailout) had declared its support for this collateral concept.  Once each of these countries claimed collateral (and there was never any option of them paying otherwise) it was always inevitable that other countries would call for the same – as happened, in due course, with Slovenia, Austria and the Netherlands.  Other Eurozone states would be doing exactly the same were they not confident that no money from Greece II will ever change hands.

The IMF knows it's been had, and is trying to work out how to get out of the mess.  The Greek economy is giving them plenty of potential excuses.  The dependence of Greek banks on the ECB and the flight of Greek depositors to banks in other parts of the Eurozone (or, for those with the means, to private vaults) are well-known.  Less clear from the data, but strongly supported by anecdotal evidence, is the silent flight of Greek professionals, leaving Greece for other parts of the Eurozone because they fear that once Greece leaves / is ejected from the EU (likely to follow hard on the heels of Greek withdrawal from the euro), then they will not be permitted to move to other Member States, but they do not expect to be ejected if they are already there.  (Incidentally, if there is a wider EU breakup, this factor is liable to create huge tensions – whilst Polish immigrants in, say, Portugal, would be unlikely to be ejected immediately if free movement were abandoned, how long would the Portuguese really accept large immigrant populations, from countries from which new immigration would not be permitted, if there is high unemployment for the Portuguese?)

Professionals are also departing because of the ongoing Greek recession – and losing one's highest-value workers is not good for long-term competitiveness.  I suspect that the official figures for the recession (an annual 7.3 per cent rate of contraction in the last quarter) overstate the depth.  My guess is that what was already widespread and notorious tax evasion in Greece has gone totally pathological in recent months, and as companies refuse to report their profits accurately and as workers understate their incomes for tax purposes, the official GDP numbers shrink as a result.  But even if the recession is not as bad as the official figures suggest, it is still surely bad.  And whether because they can't pay or they won't pay, the taxes aren't coming in.  Without tax receipts, far from Greece repaying its debts, they are rising.  Whatever its government says, and whatever pretence IMF and EU policymakers might like to maintain, between them the Greek economy and Greek taxpayers have decided that Greece is not paying.

We approach the final furlong.  Without the Greece II bailout money, and without a miraculous turnaround in both its economic growth and its ability to garner tax receipts, Greece now has no realistic chance of making its March 2012 debt repayment - which would surely trigger a full-blown default.  If the IMF loses patience first, and the Greek I bailout is not continued to the bitter end, default could come much sooner.