Poles apart?

Photographer: Yorgos Karahalis/Bloomberg

Greece Is Running Out of Money, and Time

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Greece, as everyone knows, is running out of money. That means it might not be able to pay its debts, including what it owes the International Monetary Fund, which should be a cause for serious anxiety in Europe. But there's a dangerous myth starting to gain traction that the nation could default on its obligations but still remain a member of the euro.

Greece's Fiscal Odyssey

On Monday, the Financial Times said Greece is poised to default on 2.5 billion euros of payments owed to the IMF in May and June if it doesn't get additional bailout cash. The newspaper cited "people briefed on the radical leftist government's thinking." Germany is making contingency plans that would let Greece stay in the euro even if it defaults on its debts, the Die Zeit newspaper reported today, without citing its sources.

Figures released today show Greece's budget surplus was just 0.4 percent of gross domestic product last year, well short of the 1.5 percent it had promised as part of its bailout terms. The Greek government has said it needs funds by April 24, when euro-region finance ministers are scheduled to next meet; but Friederike von Tiesenhausen, a spokeswoman for the German finance ministry, told reporters today that "no one in the euro group expects that this could be completed by April 24." No wonder Peter Kazimir, the Slovakian finance minister, said today that Greece is moving "closer to the abyss. Nothing can be excluded."

Greek bond prices are suggesting there's little chance that investors will get repaid in full. It's almost exactly a year since investors lent the country 3 billion euros by buying 4.75 percent bonds repayable in 2019, a sale that the front page of the Financial Times heralded as the country coming "out of bond exile." Here's how that trade worked out in price terms:

As of today, anyone who bought that bond at the issue price of 99.133 cents on the euro has lost a third of their capital. Investors are now charging the country a punitive 23 percent for two-year money; that's twice the yield on its 10-year bonds, an inversion that suggests money managers are concerned about the short-term outlook for getting their money back.

If Greece is really considering defaulting on its IMF obligations, its situation is more dire than most observers appreciate. Reneging on the IMF just isn't done by countries that want to stay respectable. Here's economist Kenneth Rogoff, writing in 2002:

IMF loans have had a stubborn habit of being repaid in full. Although some countries have gone into arrears, almost all have eventually repaid the IMF: The actual realized historical default rate is virtually nil.

Just three countries are currently behind on their IMF payments, according to the fund's latest report. Sudan's arrears total more than $1.4 billion, with Somalia overdue on $322 million and Zimbabwe's unpaid debts worth $110 million. It beggars belief that Greece could join the three African countries in defaulting to the IMF without also getting kicked out of the euro.

It may not be a failed state in the way that Zimbabwe is, but default would underscore the perception that Greece is a failing state. That would destroy any remaining trust in the Greek government, with Germany likely to run out of patience. Even though there's no legal mechanism in place to revoke euro membership, it would quickly become obvious to everyone that being in the common currency and being effectively bankrupt are incompatible.

German Finance Minister Wolfgang Schaeuble said today that the current Greek government has "destroyed" any progress that the previous administration made on resolving its economic problems, and that there's no chance of an agreement this month. So if April 24 really is the deadline, and Greece's euro partners see no chance of reaching a deal by then, the endgame for the Greek drama is just a little more than a week away -- and there seems little prospect of a happy ending.  

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net