Greece is running out of money.
Among its obligations, the country owes:
- $3.9 billion to the European Central Bank (ECB) coming due on July 20
- over $1 billion to the International Monetary Fund (IMF) on a debt due earlier this month
- about $1.5 billion in monthly wage and pension costs
- a total of $10.5 billion due to the IMF later this year
- government debts (not accounting for unfunded pension liabilities) of about $400 billion. Greek GDP was only about $240 billion last year
Without a new financial lifeline, Greece's shuttered banks will remain so, and millions of the country's citizens won't be able to access their savings. And while Greece is sending gestures of compromise toward Europe's financial heavyweights in public statements, there are no concrete proposals yet that either side seems willing to live with.
What comes next? From here, it is uncharted waters for the 17-year-old eurozone.
Greece could leave the currency altogether and reissue the drachma – though the government has insisted that's off the table. A period where informal currency, essentially IOUs from the government, comes into being while an eventual deal is worked out is also possible. It is an open question how much credibility those IOUs might have with Greeks, as they look at the mound of unpayable debts held by their government.
And while Prime Minister Alexis Tsipras received a landslide vote of confidence in a referendum on Sunday that rejected bowing to European demands, public sentiment could shift sharply if, say, the government forcibly decided to convert Greek savings from the euro to a new currency that would certainly have far less purchasing power.
Promise of reforms...
Greece is clearly desperate to stave that off. The Washington Post has published the one-page letter the country's new Finance Minister Euclid Tsakalotos sent to European banking officials Wednesday. The letter is short on specifics. In a nutshell, Greece is asking for a three-year loan of unspecified amount from the eurozone's European Stability Mechanism (ESM) bailout fund, to pay some of its existing debts and prop up its banks.
In return, "reforms" related to local taxes and pensions are promised, with details to follow.
Interestingly, the letter appears to abandon the Greek demand that the principal on the debt owed be reduced. That demand was based on the idea that it's simply not reasonable to expect that Greece will be able to generate the excess government revenue to pay down the debt without pushing its economy, and the human misery it's generating, into a deeper hole.
"Greece is committed to honor its financial obligations to all its creditors in a full and timely manner," Mr. Tsakalotos wrote. Prime Minister Alexis Tsipras promised details on Thursday – which is looking like the witching hour for Greece, with not just foreign debts piling up, but its banks teetering and concerns growing about its ability to pay firemen, cops, and teachers.
... and hints of haircuts
But as has also recently been the case, there are still mixed messages.
The letter also spoke of exploring "measures to be taken so that its official sector related debt becomes both sustainable and viable over the long term," which sounds a lot like the debt haircuts Mr. Tsipras has been pressing for. In other words, not paying creditors "in full."
Mr. Tsipras also referred to haircuts in a speech Wednesday at the European Parliament in Strasbourg, by bringing up "debt sustainability" and also referred to the "resilience and patience of the Greek people" being exhausted after years of austerity.
Tuesday night, German Chancellor Angela Merkel seemed in little mood for giving in on debt relief – at least without substantial sacrifices from Greece. "The conditions for starting negotiations on a program in the framework of the ESM continue not to exist," she said last night in Brussels. "We need very detailed proposals from the Greek government for a medium- and long-term program. Our expectations from today’s Eurogroup are that this should occur by Thursday."
The ESM, as in so much of the eurozone's financial infrastructure, seeks to impose political decisions on members they would not otherwise take themselves. Or as the European Central Bank puts it:
"From the ECB's perspective, it is crucial that the existence, design and activities of the ESM do not create moral hazard, but rather strengthen the incentives for prudent fiscal and economic policies in all euro area countries. For this reason, it is essential that any financial assistance will be subject to very strict macroeconomic policy conditionality and be granted on non-concessional terms."
"Moral hazard" is what economists mean when risk can be taken on by other governments or individuals with limited fear of negative consequences, which almost always leads to unsustainable borrowing or investment. (The perfect example of the week is China, where the central bank is bailing out investors who participated in a frenzy of speculation around local stocks in the past year.)
But while much lip service is paid to the concept, around the world it's applied unevenly. Think of Bear Sterns being forced into liquidation while Citigroup was bailed out, or the fact that the vast majority of European and IMF funds given to Greece so far have been used to pay out private banks, mostly in France and Germany, who were as imprudent in their lending to Greece as the country was in taking it. Nevertheless, Greece, which has already cut government spending drastically over the past five years, is being asked to do more (the ECB's "prudent fiscal... policies").
To be sure, the elephant in the room is the Greek attitude towards taxation, where non-payment is not only tolerated, but seemingly defiantly celebrated. Financial writer Michael Lewis deftly outlined it in a 2010 article and – with the economy having shrunk by about 20 percent since and unemployment having surged – the chances of Greek happiness at finally being forced to pay are slim.
The scale of Greek tax cheating was at least as incredible as its scope: an estimated two-thirds of Greek doctors reported incomes under 12,000 euros a year – which meant, because incomes below that amount weren’t taxable, that even plastic surgeons making millions a year paid no tax at all. The problem wasn’t the law – there was a law on the books that made it a jailable offense to cheat the government out of more than 150,000 euros – but its enforcement. “If the law was enforced,” the tax collector said, “every doctor in Greece would be in jail.” I laughed, and he gave me a stare. “I am completely serious.” One reason no one is ever prosecuted – apart from the fact that prosecution would seem arbitrary, as everyone is doing it – is that the Greek courts take up to 15 years to resolve tax cases. “The one who does not want to pay, and who gets caught, just goes to court,” he says. Somewhere between 30 and 40 percent of the activity in the Greek economy that might be subject to the income tax goes officially unrecorded, he says, compared with an average of about 18 percent in the rest of Europe.
That's a big part of the reason German and French and Latvian and you name it European voters are angry with Greece. After the country joined the euro in 2001 – thanks in part to accounting fraud on a massive scale that all involved decided to turn a blind eye to – the wave of cheap credit it unleashed on the country went to a massive expansion of public sector wages and employment. The bill has come do, and no one wants to pay.