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14 June 2015

EUbusiness: Greece's debt drama - the possible scenarios

Crunch talks between Greek and EU-IMF officials have broken off with no deal, making a Greek default an imminent danger and increasing the threat of Greece leaving the euro. Success in the talks still remains possible, though the chances are fading fast.

Deal or no deal, here is a review of the possible scenarios in the coming days or months:

Deal... and lifeline maintained

It would be a shock if leftist-led Greece fully satisfied its EU-IMF creditors, but if it were to do so, the 7.2 billion euros remaining in its current rescue programme would be enough to pay off looming debts to the IMF and ECB, as well as pay state salaries and pensions.

But any satisfaction would be short-lived. Greece is buried under a colossal pile of debt, about 180 percent of annual output, almost double what the national economy produces every year and largely seen as unsustainable without the economy growing far faster than even the most optimistic forecasts.

Bailout extended

Before the radical left Syriza party swept to power in January, Greece seemed on its way to a third bailout financed by fresh cash, but Germany has slammed the door shut to this possibility.

What is far more likely is that Greece wins an extension to the current bailout, its third since December, which would allow more time to talk and keep vital funding flowing from the ECB to the teetering Greek banks.

The extension would probably last nine months from its current June 30 end date.

During that time, the Greek government would receive in instalments the 7.2 billion still owed them, conditioned on the Tsipras government pushing through any reforms agreed to in the talks underway.

The Greek government would also like to tap into the 10.9 billion set aside to finance Greece's banks, though the eurozone ministers have already once refused them this.

In addition, Greece would like to transfer all remaining debt owed the European Central Bank to the eurozone's new bailout fund, which is controlled by the member states.

Athens, perhaps inaccurately, sees the European Stability Mechanism as more flexible than the German-influenced central bank and the debt would be spread much longer over time.

Debt reduction

In 2012, eurozone ministers raised the possibility that in return for reforms, Greece could see some debts forgiven and in Athens, no matter the party in power, no one has forgotten this.

But it remains extremely unlikely that Greece's eurozone partners will return to this idea any time soon, especially with the current talks turning so sour.

The European partners have already done a lot with their loans to Greece: extending maturities for even longer than 30 years, slashing interest rates, as well as other measures.

Many economists advocate for debt forgiveness, as does the IMF, but the debt cut, known as a haircut, is for now a non-starter.


The idea that Greece will miss a debt payment to the IMF on June 30 is no longer taboo and was raised at a meeting of top eurozone officials at their annual meeting in Bratislava last week.

While not an official default, the missed payment would trigger panic on the markets for everything Greek, including a run on Greece's barely-standing banks, if the failed talks over the weekend do not trigger that already.

Once the bleeding begins, emergency measures could include the introduction of strict capital controls, closure of the banks, and the government issuing IOUs to finance the public sector, while preserving every last euro to pay off more debt.


Greece exiting the euro is the one scenario that few want to imagine, as it would not only bring damage to the single currency, but to the European Union project as a whole, just as Brussels faces threats from Putin's Russia over Ukraine and talk of an EU divorce by Britain.

But beyond the crushing embarrassment, it would also risk contagion, with market players on the hunt for the next weakest link in the eurozone.

Full article on EUbusiness


© EUbusiness

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