Greece’s real crisis deadline arrives with ECB debt to pay


Greece has reached the deadline it couldn’t afford to miss, for a bill it can finally afford to pay.

Monday is the day the country must reimburse the European Central Bank 4.2 billion euros ($4.5 billion), including interest, as bonds bought during its last debt crisis mature. The impending reckoning may have been the factor that eventually forced Prime Minister Alexis Tsipras on July 13 to accept the austerity he and his electorate had previously rejected, in return for the funds needed to keep his nation from default.

As Greece blew past multiple political and financial supposed end-dates over the past five months, July 20 always remained make-or-break. European Union law bans the ECB from financing governments, meaning a default would probably require it to pull support from Greek lenders, leaving an exit from the single currency all but assured.

“The issue of repayment to the ECB was pivotal, because failure to make the payment would have had a knock-on impact on the ECB’s willingness to continue providing Emergency Liquidity Assistance to the Greek banks,” said Ken Wattret, an economist at BNP Paribas SA in London. “As the realization dawned that Greece was facing a very disorderly, painful exit from the monetary union, the government stepped back from the brink.”

Draghi Approval

While Greece should now have the funds to make the payment, politicians cut it fine. Euro-area leaders agreed on a bailout package worth as much as 86 billion euros in an overnight summit that ended last Monday morning. The Greek parliament approved the austerity measures linked to the aid in the early hours of Thursday morning, and the currency bloc signed off on 7 billion euros of bridge financing the next day.

ECB President Mario Draghi signaled his approval on Thursday by persuading his Governing Council to increase the ELA that is keeping Greek lenders afloat. Banks were scheduled to reopen for basic services on Monday, three weeks after they were shut to prevent their collapse.

The ECB hasn’t said if Greece is expected to pay its debt by a specific time. A spokesman for the central bank declined to comment. In a press conference after its decision on ELA, Draghi said he was confident his institution would get its money back on its Greek bonds.

“All my evidence and information leads me to say we will be repaid,” he said in Frankfurt. The idea that Greece might default “is off the table,” he said.

Debt Relief

Greece’s government missed a repayment of about 1.5 billion euros to the International Monetary Fund on June 30, though Draghi said he believes those dues will also now be handed over.

The longer-term outlook for Greece’s ability to keep repaying its creditors remains unclear. With recession crippling the economy, the debt-to-gross domestic product ratio could rise toward 200 percent, according to an IMF forecast. By comparison, most advanced economies are well under 100 percent.

Draghi said it is “uncontroversial that debt relief is necessary” for Greece, and that the most important question is what the best way to achieve that would be within the bloc’s existing rulebook.

In its analysis released last week, the IMF said Greece needs to have its debts reduced “far beyond” what European partners have so far been willing to entertain. IMF Managing Director Christine Lagarde said on France’s Europe1 radio on Friday that Greece’s aid deal is “categorically not” viable unless the burden is eased.

No Haircut

German Chancellor Angela Merkel told German broadcaster ARD that she’s prepared to consider the matter, though only after Greece completes the first round of a new bailout.

“When the first successful assessment of the program being negotiated now is completed, exactly this question will be discussed,” Merkel said on Sunday. “Not now, but then.”

Even so, she ruled out a reduction in the nominal value of Greek debt — a so-called haircut — and Finance Minister Wolfgang Schaeuble told Germany’s parliament on Friday that “a debt cut is not compatible with European law.”

Finnish Prime Minister Juha Sipila said in an interview on Thursday that talk of a haircut is “useless” and the most important thing is that the debt load stops increasing.

“A nominal cut on loans granted by euro-area states could be interpreted, from a legal point of view, as fiscal transfers,” said Bloomberg Economics analyst Maxime Sbaihi. “To avoid the legal issues, extending the grace period for debt repayments beyond 30 years looks like one of the only workable solutions.”

‘Unfinished Business’

Valdis Dombrovskis, the European Commission vice president for euro policy, said in a Bloomberg interview on Friday that while a haircut has been rejected by the region’s governments, options such as lower interest rates or a maturity extension can still be discussed.

“The Greek crisis has clearly exposed that the monetary union has a lot of unfinished business,” Gianluca Salford and Malcolm Barr, analysts at JPMorgan Chase & Co. in London, said in a note. “The original idea of the euro area as a club of self-sufficient AAA countries based on the aspiration of debt- to-GDP ratios converging over time toward 60 percent never materialized.”