Week in review: Greece is running out of cash: Reports last week that Greece is running out of cash and has asked the IMF to delay payments due in May have sparked the debate about Greece defaulting on at least part of its debt. In May, Greece is due to repay €1bn to the IMF and to rollover 1.4bn of bills (short-term debt securities). In June, Greece needs to repay a further 1.6bn to the IMF and to rollover 2bn bills. The peak in payments will be July, when Greece is due to pay 0.5bn to the IMF, and to rollover 5.5bn worth of bonds and bills. In 2015 as a whole Greece will have repaid 7.2bn to the IMF. This is the same amount the Greece is due under the assistance programme, if it presents to its European partners a package of reforms that satisfies its creditors when Finance ministers meet on Friday. However, hopes of a deal are mostly gone by now.
As a result, markets and policy makers are now preparing for the possibility that Greece could default to the IMF in May. Defaulting on payments and pensions is highly unlikely to a Syriza-led Government. What would this mean for the euro area? Legally there is no reason why Greece would need to leave the euro area if it defaults on its debt. There is actually no plan for any EMU country to leave EMU under any circumstances, anyway. Technically, Greece has restructured part of the debt held by the private sector and the official sector in the last few years, with no impact on its prospects for EMU membership. This time around the default would most likely be unilateral, i.e., not negotiated, which would probably mean that the ECB would probably suspend or severely limit the Emergency Liquidity Assistance to Greece. This could potentially force the Government to request Greece’s euro exit to allow for the Central Bank to print its own currency and keep the financial system afloat. However, if the ECB or any other institution were to continue to support Greece’s banks, Greece could remain in the euro area.
The dreaded unilateral default does not automatically entail that Greece needs to leave the euro, however, it does increase the probability of a Greek exit. The decision to keep Greece inside the club is likely to be a purely political one. From the standpoint of the Greek Government, it’s a question of survival, as most Greeks still favour remaining with the euro. From a European perspective, in the longer run a Greek exit would likely increase the pressure on the weaker link, i.e., Portugal. Ultimately, we still believe that both will prefer Greece to remain in the euro area, but probably at the cost of continued political and economic crisis.
On the monetary policy front, the ECB has stated that its enhanced Asset Purchase Programme (APP) will continue until September 2016, even if the recovery takes hold faster than expected.
The IMF has upgraded its forecasts for the world. Globally, GDP growth is expected to rise 3.5% in 2015 and 3.8% in 2016 (0.1 p.p. more than in the October forecast). The projections for the euro area have increased the most, up 0.3 p.p. and 0.2 p.p. respectively to 1.5% in 2015 and 1.6% in 2016. US growth has been downgraded due to the weakness in the first quarter, which was mostly weather-related. However, trend growth is seen having declined globally, due to the ageing populations and under-investment during the crisis.
- Wednesday 22 April:
- European Commission consumer confidence indicator: consensus is for a rise as economic prospects improve thanks to low oil prices and a weaker euro
- Officials from EU, Russia and Ukraine speak about the crisis in Ukraine
- Thursday 23 April: Eurozone Flash PMI: Consensus is for a small rise from 54 to 54.4 or 54.5 in the composite index
- Friday 24 April/Saturday 25 April: EU finance ministers and central bankers meet to discuss Greece – no deal expected