Fears are growing that Greek sovereign debt default may be inevitable, and even the future of the euro itself is being questioned, but what are the possible scenarios and how might the crisis now evolve?
Scenario 1 The new bailout is successful
The first priority for the Greek government is to secure a 12bn euro ($16.2bn ) loan instalment by 3 July – part of the 110bn euro loan package granted by the EU and IMF in May 2010. But even if the parliament adopts the new austerity measures – tax rises, spending cuts and privatisation – necessary to find that 12bn euros, the relief will be only temporary. Nervous markets will settle if the EU agrees a new rescue package for Greece worth 120bn euros, giving Greece time to restructure its economy, increase much-needed tax revenue and at some point, return to commercial lenders. The new package is necessary because the ratings agencies have downgraded Greece’s sovereign bonds so much that it cannot afford to borrow from commercial lenders. European leaders have staked their credibility on the euro succeeding, so as a last resort to prevent the eurozone’s first sovereign default, they are preparing the new rescue package, the intention being to buy time to restore confidence in the euro and reduce Greece’s huge debt.
Scenario 2 The Papandreou government falls
Papandreou is trying to shore up support within PASOK and new finance minister Evangelos Venizelos has been appointed to quell dissent in the PASOK ranks. New Democracy objects to aspects of the austerity program. If parliament fails to adopt that program by the end of June (to satisfy conditions for the new bailout), Papandreou could lose further support inside PASOK and his government could fall. Such a political meltdown would have far-reaching consequences; default would look inevitable and the IMF and EU would almost certainly halt any further lending. New Democracy might decide to support a weak PASOK minority government by forming a “national unity” coalition with a trade-off; demanding key cabinet posts in a last-ditch effort to appease the markets and international lenders. However, a snap election is more likely, with it turning into a virtual referendum on accepting further international bailouts, (and the terms of such bailouts) and the country’s future in the eurozone.
Scenario 3 A different kind of default – debt restructuring
If Greece cannot meet its debt obligations it will have to tell its creditors that they won’t be getting all the money they were owed. They will get most of it, but later than agreed. It is a process known as “debt restructuring”. To work this debt restructuring would require holders of Greek government bonds to accept less than they were worth – or in the jargon of the markets, “take a haircut”. According to analysts, the size of that haircut could be anything between 20 per cent and 50 per cent. The downside is that ratings agencies would almost certainly treat debt restructuring as a default, postponing the day of reckoning that they believe Greece must face. Last week, Germany poured cold-water on the idea of full-scale debt restructuring because of its uncontrollable effect on the markets.
Scenario 4 Greece quits the euro – temporarily
By having the euro, Greece is not able to restore its economic competitiveness by devaluing its currency, as it could have done with the drachma. Some commentators suggest that Greece could give up the euro, but not for good. Instead, it could take a “eurozone holiday”, temporarily avoiding the constrictions of the single currency and returning when the time was right. In such a scenario, Greece would return to the drachma at a new exchange rate: some commentators suggest one euro would equal one drachma. It would then devalue by perhaps a quarter and return to the eurozone after a few years had passed at, perhaps, 1.3 drachmas to the euro. Such a measure would cut labour costs and boost exports but it could also increase the size of Greece’s debt.
Scenario 5 Outright default
Default by Greece would be bigger than Russia’s (1998) and Argentina’s (2001) default put together. The big EU economies that have lent to Greece would be hardest hit. German and French financial institutions hold around 70 per cent of Greek debt. Greek banks could go bankrupt. They hold around a quarter of Greek sovereign debt. The fear for Europe is ‘contagion’ – with Greece defaulting, other eurozone countries would find it more expensive to borrow in commercial markets, and countries like the Irish Republic and Portugal would need further EU-IMF bailouts. For reasons of self-interest, the EU is likely to go to any lengths to stop Greece from defaulting outright.
Research source: BBC News