Article / 27 April 2015 at 1:37 GMT

What is Plan B for Greece – Eurozone banishment and bankruptcy?

Managing Partner / Spotlight Group
United Kingdom
  • German Finance Minister Schäuble suggests Berlin is preparing for a Greek default
  • Dutch Finance Minister Jeroen Dijsselboem warns of big problems need solving
  • The "B" in Plan B could stand for Eurozone banishment – and bankruptcy

By Stephen Pope

The ongoing tragic tale of Greek financial misfortune has taken yet another turn as the German Finance Minister Wolfgang Schäuble hinted that Berlin has begun to make preparations for a possible Greek default.

During a press briefing on Saturday, following the Friday Eurozone Finance Ministers meeting, Schäuble was asked directly about whether there was a consideration of a "Plan B" that would be brought into effect if funding negotiations with Greece fail to reach a successful outcome. He was quite terse in his response:"You shouldn't ask responsible politicians about alternatives."


Greece can either decide to carry out tough reforms to get the funds its needs, or dismiss austerity and change to please its supporters. But it cannot do both. Photo: iStock

Ever the astute political operator, he was fully aware that if he were to confirm such a scenario it could lead to a wave of panic and pandemonium in the Eurozone capital markets.

Vilifying Varoufakis

Think about the words the German finance Minister used – "responsible politicians”. At the finance ministers' meeting on Friday, the Greek finance minister, Yanis Varoufakis, was sharply criticized for allowing Greece to drag its feet on submitting a list of meaningful and effective reforms that would unlock funding from its international lenders. 

It was suggested that Greece was taking yet another step toward the cliff edge, even though Athens is rapidly running out of cash as without new lending it will not be able to service its debts. This was a thinly veiled attack on the Finance Minister and the Prime Minister, Alexis Tsipras. Since their election victory in January, nothing has been put forward that the international creditors regard as remotely practical, workable or serious.

Dutch Finance Minister Jeroen Dijsselboem, who leads the Eurogroup, warned that "big, big problems" were in need of a quick solution before a new debt deal for Greece could be arranged.

Greece has to repay its creditors nearly €1 Billion in May, and is struggling to raise the money. As reported in an earlier Market Comment last week, the Athens government demanded that public sector bodies hand over any reserve cash to help make the payment.

The reason it is so crucial for both sides to find common ground is that the release of the next tranche of funds from its main creditors, the European Union, the European Central Bank and the International Monetary Fund (EU, ECB and IMF) totalling €7.2 billion is at stake.

Dijsselbloem rejected outright a proposal from Varoufakis for early cash after partial reforms were made. Dijsselbloem told a press conference:"A comprehensive and detailed list of reforms is needed …A comprehensive deal is necessary before any disbursement can take place ... We are all aware that time is running out."

The frustration with Greece is widespread as the European Commissioner for the Euro, Valdis Dombrovskis (from Latvia) said: "Progress in technical negotiations has not been sufficient to reach any conclusion during this Eurogroup here in Riga,"

Wishful thinking now inexcusable

The Eurozone member states are tired of waiting and growing increasingly impatient for the Greek government to present a package of economic reforms that is sufficiently detailed and practical as to improve the country's finances. This has been stressed over and over again as a condition of further support.

Having campaigned so vigorously to oppose austerity and cease being beholden to the EU, ECB, IMF troika, it now seems that the Greek Prime Minister and Finance Minister are boxed in as they face a modern “Catch 22” condition.

• Grow the economy, implement austerity and reform, gain access to cash to pay the bills
• Please the electorate, dismiss austerity and reform, give up any access to cash, cannot pay the bills

The above two paths are mutually exclusive and yet still Mr Varoufakis seeks to walk a path of denial by insisting: "We agreed that an agreement will be difficult, but it will happen and it will happen quickly because that is the only option we have,"

That response is based on the view that the Eurozone will eventually cave in and give ground to Greece as the implications of Greece leaving are too fearful to contemplate, let alone allow to happen.

On Friday, Varoufakis wrote a blog post saying Athens and its creditors "agree on much", namely that Greece's tax and pensions system, as well as its labour market, need fundamental reform. He then added that his government and its creditors did not agree on how best to implement this reform. I am sorry Minister, but those that control the purse strings tend to be the ones that call the tune. 

However, Varoufakis doesn’t see the world that way and in this department he has form. When he was in academia he wrote in 2012 for a blog:"The actual cost of severing Greece will prove equal to that of dismantling the Eurozone itself painfully, slowly, catastrophically,"

Varoufakis is an intelligent man so he should stop his posturing and accept that eventually Greece may be shown the door. It really could happen.

The Euro project is bigger than that idea, and whilst it would fall apart if Germany or France were to quit, it could survive if a peripheral nation were to be ejected; after all it accounts for just 1.89% of the region's GDP. In fact the markets might actually some tough talking and honesty from a region that has for too long muddled through in a game of duck and cover.

Debts fall due

Greece has 15 separate debt payments that need to be made between now and the end of July. These total €16.5 Billion and include redemption of its short-term government debt (T-bills), paying off IMF loans, and honouring the coupon and maturity sums on sovereign bonds held by the ECB.

Could Greece default and stay inside the Eurozone? One has to say that the viability of such a scenario would depend heavily on which of these payments was not fulfilled.

Greek debts 2015

Source: IMF, Datastream

The most obvious case of default would transpire if Greece was unable to redeem government bonds held by the ECB and on April 25, The Daily Telegraph reported that leading Greek officials have hinted this is their preferred default option. They believe the ECB has kept the country on a tight leash since Syriza was swept into power at the end of January by refusing the right to keep issuing Treasury Bills as has been done in the past.

This would not happen until July, as that is when €3.5 Billion of ECB-owned Greek debt is due to mature.

One can only hope that in the 10 weeks until such an event could occur, the Greek government will offer up a viable package or reform proposals so that Plan A can be implemented and Plan B never has to see the light of day. After all in this situation Plan B is just code for “bankruptcy” and Eurozone “banishment”.

– Edited by Robert Ryan

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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