Has Greece Already Decided on Grexit?

It has been a month since Greece was approved a four-month extension of its current bailout program, on condition that the leftist government implements a number of settled agreements. The extension, however, will only last until the end of June, which means that afterwards Greece will have to carry out serious reforms in order to convince its European creditors to sign the new bailout agreement. Unfortunately, a newly submitted reform plan, as well as controversial attempts to find funding abroad, suggests that Greece might instead be moving towards potential exit from a single currency area.

The Greek government’s first attempt to unlock 7.2 billion euros worth of bailout funds did not receive much enthusiasm from the Eurozone authorities, which claimed that proposal lacked detail and substance. On Wednesday, Greek officials resubmitted a 26-page reform plan with estimated revenues of 6.1 billion euros this year (as well as funding needs of 19 billion euros). But it appears that the new plan, just like the previous one, includes only revenue raising measures, and hardly addresses any spending cuts. As a matter of fact, contrary to EU demands, the new document includes 1.1 billion euros worth of fresh spending, more than half of which is intended to cover the “13th pension”—an extra month’s pay for low-income retirees or, more specifically, for those who receive less than 700 euros per month. Furthermore, the five measures addressing the labor market included an increase in minimum wage and strengthening collective bargaining.

The group of 19 Eurozone finance ministers discussed new reforms during the telephone conference on Wednesday, but debate showed little progress, with some officials claiming that the new submission remains insufficient and too optimistic. Meanwhile, the Greek Prime minister Alexis Tsipras promised his members of Parliament that he was not willing to give in to creditors by imposing what he termed recessionary measures on the economy. The head of the Bundesbank Jens Weidmann, however, urged the Greek government to talk less and demonstrate more action, as Greece is running out of time. According to some reports, during the telephone conference Greek official revealed that Greece will run out of cash after April 9. The statement was later denied by the Greek finance ministry.

According to Goldman Sachs, Greek capital flight has reached an estimated 15.2 billion euros over the last three months, which together with tighter market conditions caused a severe shock to the economy. While deposit withdrawals declined to around 3 billion euros in March, the outflow since October has totaled 28 billion euros. In the mean time, Greek banks are continuing to purchase government debt instruments, using the emergency liquidity assistance (ELA) provided by the European Central Bank (ECB). Therefore, it is not surprising that on Wednesday Fitch Ratings downgraded four Greek banks’ long-term issuer default ratings (IDR) from “B -” to “CCC”, following the downgrade of the country’s sovereign rating last week.

In addition, Greece is due to make a crucial 448 million euros payment to the International Monetary Fund (IMF) on April 9. The government also faces 1.4 billion euros in refunding of 6-month T-bills, and 1 billion euros in 3-month T-bills later in April. The Bank of America warned that a failure to deliver the payment to IMF could unfold a critical sequence of events. First of all, it would trigger a parallel default to the European Financial Stability Facility (EFSF), which in turn could cancel the loan packages and request immediate repayment. A failure to repay EFSF would result in automatic default on Greek government bonds issued under the bailout agreement. The recent Greek government’s position, suggests that this scenario is very likely, with a senior government official saying “We are a Left-wing government. If we have to choose between a default to the IMF and a default to our own people, it is a no-brainer”.

Likewise, Greece’s foreign policy stance does not show much solidarity with other EU countries. The Greek Prime Minister continues to claim that EU sanctions against Russia are a “road to nowhere,” and that Russia’s reciprocal embargo on food caused serious damage to his country’s economy. Mr. Tsipras, who originally planned to travel to Moscow in May, has rescheduled the meeting and is about to meet the Russian President Vladimir Putin on April 8. The Greek government stressed out that it is not seeking funding from Kremlin, but sceptics view this visit as a turn to the East, since Greece is on a collision course with Germany and other creditors over the terms of the bailout money. To further exacerbate the situation, yesterday Greek government decided to put a figure (279 billion euros) on World War II reparations from Germany.

Nevertheless, the highlight of the country’s foreign policy appears to be the Greek delegation’s visit to Iran. The opposition leader and former Prime Minister A. Samaras in his interview with Bloomberg questioned his successor’s commitment to the single currency, adding that A. Tsipras “sent his cousin to Iran to ask the Tehran government to buy Greek bonds.” Yet his New Democracy party is still willing to join the coalition in order to keep the country in the Eurozone. Whether that will be enough—remains a question. Mr. Samaras had a great point about the SYRIZA-led government: “When you are in Europe and ask Chinese, Iranians, Russians to finance your deficit, don’t you send a signal to the rest of Europe that you are not really a serious pro-European?”