While the world’s media was rightly focused on the horrible events unfolding in Manchester on Monday, a worrying development was also occurring in Brussels. There, finance ministers from the 19 European Union (EU) states that use the euro as their common currency, were meeting — a gathering that also included representatives from the International Monetary Fund (IMF).
On the agenda was whether or not to release the latest pay-out — or tranche — of funds to Greece, part of the €86 billion (Dh353 billion) bailout agreed to in August 2015. That bailout was the third to be arranged for the Athens government between the IMF, the European Central Bank (ECB) and some EU member nations.
A succession of Greek governments received bailouts in 2010, 2012 and 2015 totalling €240 billion, with the conditions for each subsequent payout being more stringent than the previous one. The €240 billion amounts to €294.6 billion after interest.
Under the terms of the 2015 bailout, the Greek government had to agree to a series of austerity and economic reform measures, with the creditors’ funds being released in a series of tranches to ensure compliance.
Simply put, if the government of Prime Minister Alexis Tsipras in Athens doesn’t meet the conditions, the tranches stop coming and Greece defaults on its bond repayments. It goes bust — an event that would send shock waves across global markets, destroy confidence in the single currency, and mean that the Greeks would be forced out of the euro and would have to revert to their drachma, or similar.
But the Greeks aren’t the only ones in trouble right now.
In Spain, holiday villas and apartments have been snapped up by Britons seeking their dream retirement or vacation homes in the sun. Since the Brexit vote, there is anecdotal evidence from real estate agents that the Brits are no longer buying as they did before.
Given that there are 1.5 million Brits living in other EU nations — and 800,000 of those live in Spain, its Balearic and Canary islands, they have become jittery over their future when Brexit takes effect. Right now, under the EU’s freedom of movement rules, any member of any EU state can work, live and buy property in any other state without visas or any other legal impediments. Come Brexit, the future of the three million EU citizens who live in Britain, and the 1.5 million Brits abroad, will have to be settled — so the British clientele for Spanish holiday villas is drying up.
Spanish real estate agents, however, aren’t twiddling their thumbs — there has been a considerable uptick in wealthy Italian clients buying those villas. The anecdotal evidence suggests that they are eager to move money, whether black or white — illegal or fully-declared — out of Italy, fearing that tough times are on the way for the Italian economy and its banks.
What’s more, the empirical evidence supports the anecdotal, with Italy’s debt to gross domestic product (GDP) ratio at 133 per cent. Putting that another way, for every €1 made in Italy, the nation owes €1.33 to bond holders. It’s a vicious spiral that weighs heavily on the Italian economy, those with black or white money to dispose of — and those bond holders who hold that Italian debt.
Greece’s debt load is higher, running at 177 per cent of GDP, which is why the Eurozone finance ministers and the IMF are carefully monitoring its performance and ability to repay. For Greece, the only way forward is for its crushing debt load to be restructured, spread out over a longer term under more favourable repayment conditions. By deferring its debt, Greece can invest in its economy, get things moving again, make minimal repayments, and deal with the debt down the road — when the issue is another generation’s economic and political problem.
But the Eurozone and the IMF can’t agree. Wealthier Eurozone nations like the Netherlands and Germany don’t want to release any more funds to Greece unless the IMF continues to honour its commitments to the third bailout. For its part, the Washington-based IMF wants tougher measures on Greeks — and it believes the Eurozone nations are being too soft on Athens.
The EU believes Greece can run a budget surplus of 3.5 per cent of GDP. No way, the IMF says, pointing to an unemployment rate of 23 per cent in Greece. Simply put, with so many Greeks out of work, unable to pay taxes and unable to contribute positively to its economy, the 3.5 per sent budget surplus is way too ambitious and unrealistic.
When the finance ministers and the IMF meet again on June 19, the government in Athens will be turning out its pockets, rooting in the corners of sofas and rattling jam jars to find €5.2 billion to cover its obligations, mostly to holders of its short-term treasury bonds. Simply put, these are short-term loans Athens has that need to be repaid to creditors, with the bonds being equivalent to IOU notes at a premium rate of interest. Default of these, and Athens will be in a position it was in 2012 — one that necessitated the second of the three Greek bailouts. Back then, the holders of Greek bonds only received 50 cents on every €1 — hardly a rate of return that instils confidence in Greece or the entire euro project.
If June is bad, July gets worse. Greece’s Finance Minister Euclid Tsakalotos will likely be suffering from a case of writer’s cramp, having to sign so many cheques — and that will be the least of his worries. On July 7, a repayment of €2 billion is due on more short-term treasury bills. Ten days later, it’s make-or-break time for Athens. On July 17, the Tsipras government is due to pay a little over €2 billion to private investors who hold bonds issued by Athens in 2014 and later. No sooner than the ink dries up on those cheques will Athens have to cover another €290 million on July 18 to the IMF for a loan given under the second bailout that Greece received in 2012. Just two days later, on July 20, the European Central Bank is due two separate payments; one of €2.4 billion in bonds exempted to it under the terms of the 2012 bailout; and another €1.4 billion in bonds due to national central banks, again under the 2012 bailout terms.
Also due on July 20 is the matter of a small cheque for just €10 million to be written to the European Investment Bank to cover bonds it holds.
That’s why the clock is ticking.
