Article / 24 April 2015 at 12:18 GMT

Greece and the gamble on game theory

Managing Partner / Spotlight Group
United Kingdom
  • Greece simply must draw up realistic reforms
  • Monthly bill for pensions and salaries is EUR1.6bn
  • Huge IMF and bond payments fall due very soon
By Stephen Pope

 The Greek government is scraping the barrel to pay public wages and pensions. Photo: iStock

This is yet another “critical” day in the long-running Greek crisis as Eurozone finance ministers meet in Riga, Latvia, to discuss what should be done now given the debate over the terms and conditions on more rescue money for Greece enters its fourth month.

So far the proposals on reform from the Greek government have fallen woefully short of what its international creditors require. However, the creditors know that the international perception is that the Eurozone does not want Greece to leave and the threat of withholding financial support seems rather hollow.

However, what if the pressure were ratcheted up on Athens would the final realisation of financial reality stirs the Greek government to accept that it has to comply?

Money falls due

The stark reality is that money is running out and as the creditors are not giving Greece everything it wants the lack of options Prime Minister Tsipras faces means that the central government is really scrapping the barrel for any last drops of liquidity. 

Just this week, April 20, the prime minister ordered the transfer of cash balances held by the municipalities to the Bank of Greece (central bank) as public sector salaries and pensions fall due. In Greece, pensions are paid at the end of the month and the civil servants' salaries are paid in two stages, in the middle and at the end of the month.

The official decree stated:

"The regulation is submitted due to extremely urgent and unforeseen needs."

Institutions such as local governments, hospitals or state-owned firms are affected; they are expected to transfer approximately EUR1.2 billion to the Bank of Greece.

Each and every month the Greek state has pensions to pay for 2.6 million people and the salaries of 580,000 active civil servants and 60,000 fixed-term civil-servants or political appointees, according to the official statistics. The total monthly amount for pensions and salaries is about EUR1.6 billion.

The payment obligation means that the government needs EUR2 billion next week to meet the commitment and have a little cash left over just days before it is scheduled to repay almost EUR1 billion in two International Monetary (IMF) instalment plus a further EUR3 billion in two separate sovereign bond repayments and just as EUR600 million in interest payments is due in early May. 

The reality is that Greece may soon have to issue government credit notes to pay pensions or impose capital controls to bolster the banking system and keep money in the country.

Staying in the Euro club

So far the countless meetings of Eurozone leaders and/or finance ministers have not ventured near the option of Greece leaving the Eurozone. European Commission vice president Valdis Dombrovskis said that there is still much work to be done, however, the starting point is that the country will stay in the euro.

This appears to be another exercise in averting one’s eyes from reality as the need for a serious and honest debate about what’s going to happen to the level of debt has to be held and a decision taken.

Economy in retreat again

The Greek economic recovery that started last year has already started to retreat as the talks remain deadlocked; GDP growth shrank 0.4 percent in Q4, 2014.
Greek GDP
Source: National Statistical Service of Greece

The Ta Nea newspaper reported this week that there are currently one million Greek workers complaining of up to five months delay in receiving their salary payments. National unemployment has not been below 25 percent since June 2012, youth joblessness stands at an eye watering 50.1 percent and the country has been enduring deflation since March 2013.

No customers. But at least he has a job. Photo: iStock 

Support for Tsipras is wavering

At home the electorate that so impressively supported the prime minister in the January 25 poll is now beginning to tire of the lack of success from his confrontational negotiating strategy. Support has tumbled to 46 percent in a University of Macedonia survey compared with 56 percent just one month earlier.

The population does not see any progress being made to ease the dire straits that Greece endures. In fact, they just see talks over financial aid going round in circles. The sense is that Greece has won hardly any concessions and people now are concerned that the European Central Bank (ECB) is considering measures to restrict emergency funding to Greek lenders. This would force Greece to limit the amount of cash that Greeks withdraw from ATMs and would push the government closer to a default. With the Eurozone apparently determined to see genuine compromise from Athens, and Tsipras determined that he will not weaken his stance re austerity it may be the capacity of the Greek people to endure hardship that proves to be the stress point.

Endless needs and unintended consequences

It is being widely recognised that even if the creditors release EUR7 billion from the second bailout provision, Greece will need more aid to avoid defaulting on debt next year. Any deal now has to include improving the chances of keeping Greece and that means getting the prime minister and his finance minister in line over the need for reform.

Were Greece to default on both an internal and international basis, even after the imposition of capital controls then the march towards a Eurozone exit may become unavoidable.

Deputy Prime Minister Yannis Dragasakis said in an April 18 interview with the To Vima newspaper that the government could call a snap election or a referendum to find a resolution to the current impasse. At that stage it may be a case of finance minister Varoufakis seeking to design the ultimate exercise in “Game Theory”.

Game Theory
Source: Spotlight Ideas

Austerity measures have been highly unpopular in Greece, where there has been little economic growth and high unemployment has persisted. That said, most Greeks say they do not want to abandon the euro, but the Prime Minister is facing a serious issue as unless he agrees to reform and that means privatisation and austerity Greece will run out of cash before too long.

That may be the tipping point which drives Greece towards the exit although a Greek departure from the Eurozone would prove to be a major setback for the global economy and cause chaos in Europe and particularly Greece.

The choice facing Tsipras is clear, for all his campaign swagger and rhetoric, money is owed, it has to be paid, therefore reform and get access to the needed liquidity…It really is that simple, it is just his left-wing dogma and agenda that is making it complicated.

– Edited by Clare MacCarthy

Stephen Pope is managing partner at Spotlight Ideas. Follow Stephen or post your comment below to engage with Saxo Bank's social trading platform.


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