Ummm… Mme Lagarde? Your cheque’s in the post

Having tried pretty much every other tactic to delay paying its debt, Greece has now resorted to the oldest trick in the book: “Your cheque’s in the post”.

That’s what it’s just told the International Monetary Fund (IMF).

In short, don’t expect the Greek drama to end anytime soon.

When procrastination is the only option

Greece was meant to pay the IMF €300m today. Instead, it’s used a bit of a loophole to roll up all the payments due this month into one big payment. So Greece will now give the IMF €1.5bn at the end of the month.

It’s slightly obscure, but it’s allowed – “to address the administrative difficulty of making multiple payments in a short period”. On the other hand, it’s an option that was last used by Zambia in the 1980s. So the precedents aren’t promising.

There’s also the small fact that Greece owes €452m to the IMF and €3.5bn to the European Central Bank (ECB) in July. And in August, it owes €176m to the IMF and €3.2bn to the ECB.

You could roll that little lot up until the end of August, and it would still boil down to one thing – Greece can’t pay up unless the ‘troika’ (the IMF and Europe, basically) give it the remaining €7.2bn of bailout funds. Which in itself is just another loan extension at the end of the day.

Sounds like a waste of time really doesn’t it? Just delaying the inevitable.

It’s a rational way to look at it. It’s simply putting things off till the future. You’ll come back up against them soon enough.

However, procrastinating serves a very important political purpose: it buys time. And that’s ultimately all that matters in the eurozone.

You see, both sides in this fight need time to grope towards reality, and adjust their expectations accordingly. The eventual outcome will have big implications for the future of the eurozone – which is why Europhile pundits are so freaked out about the idea of a ‘Grexit’, which would otherwise be fairly unimportant economically.

On the one side, Greece probably won’t and probably can’t pay off all its debt. As the BBC’s Robert Peston notes, all this angst about the June deadline is rather ridiculous. All that’s happening is that Greece is desperately trying to secure a further loan from its creditors, so that it can repay an earlier loan from its creditors.

As Capital Economics notes, “unless the economy experiences a miracle, its debt ratio is simply unsustainable without a major write-down”. Even on an optimistic outlook, Capital reckons Greece will still have a debt-to-GDP ratio of a whopping 160% come 2022.

So the creditors need time to come to terms with the idea that they’re going to lose a significant amount of money, and to find the most politically acceptable way of presenting that. One way or another, if Greece stays in the eurozone, it will be getting a fiscal transfer from the rest of the region.

The only way to sell that to other voters is if Greece actually makes an effort to reform. So on the other side, the Greek electorate has to realise that it has a choice to make.

It can’t have its cake and eat it. It has to come to terms with the fact that if it wants to stick with the eurozone, it has to tackle some of the most glaringly broken elements of its economic model.

If it would rather stick with the fiscal and social status quo, then it also has to go back to the drachma. That way, the currency can act as a pressure valve to compensate for the sheer inefficiency of the Greek model.

The only way that Greece will leave the euro

So all this can-kicking is in fact a key part of the strategy. It allows everyone to gradually shed some pride, save some face, and to bring their respective positions closer together.

But it still leaves everyone with the same core questions. If the eurozone is to work, Germans need to subsidise Greeks. Just as West Germans subsidised East Germans after reunification. And Greeks need to acknowledge and appreciate that assistance by agreeing to play by the rules.

Is that a deal anyone will accept? We still don’t know. But I don’t think the Germans or other eurozone voters will get much of a say in it, frankly. No one is lining up behind Britain to arrange EU referendums.

So if Greece does leave, chances are it’ll be by accident – or it will be the choice of the Greek people. Do they want to hang on to the economic ‘kitemark’ of the euro, even if that means less generous pension schemes and the need to pay the occasional bit of tax? Or would they rather go back to the drachma with the short-term chaos and long-run uncertainty that entails?

That’s why I can see this going to the vote in Greece. Whether there’s enough time to sort that out is another matter.

It’s certainly worth watching Merryn’s recent interview with Capital Economics’ Roger Bootle on this topic if you haven’t already. He also has some very interesting things to say about a potential British exit from the EU.


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