Greece's bailout talks aren't going very well.
Prime Minister Alexis Tsipras addressed Greece's parliament late on Monday, but he gave little new indication on a deal. Greece tentatively agreed back in February to extend its existing bailout, but a lack of technical detail means its creditors still haven't paid up even as the country is fast running out of money.
So what happens if Greece doesn't get the cash?
Here's what Bank of America Merrill Lynch's researchers call "the ugly scenario":
In this scenario, Greece fails to demonstrate a credible commitment to reforms in the next few weeks. In this case, the Europeans and the IMF suspend the current program, the ECB refuses to continue increasing the Emergency Liquidity Assistance (or just lets the Greek banks run out of eligible collateral), the loss of bank deposits accelerates triggering a full bank run, and Greece defaults to the IMF and the ECB. Unless any of these shocks force the Greek government to go back and seek a deal with the rest of Europe, Grexit within this year becomes inevitable, in our view. In this scenario, either Europe would offer it as an option, allowing Greece to remain in the EU, or it would become Greece’s only option to avoid a complete collapse of the economy and even a failed state.
A payment to the International Monetary Fund is due April 9, and that's when some sources suggest the country will run out of cash. But even if Greece can last a week or two longer, the payments it has to make in the rest of the year look insurmountable.
The graph shows just how small the IMF payment is when compared with the rest of the liabilities Greece has this spring and summer. There is absolutely no chance Greece will make those payments without help. But even that bailout funding will last only a few months — the question of what Greece does then is completely open.
So what happens if the government defaults, or lingers right on the edge of default?
There's a halfway house to a full exit from the euro — the government could introduce capital controls. As it happens, Greek Orthodox Easter falls a week later than Easter in the West, meaning there is a four-day bank holiday weekend immediately after the payment is due (from April 10 to 13). That sort of extended period in which banks are closed anyway would be an opportune time to impose controls, if necessary.
What would capital controls look like? Well, Cyprus had to bring controls in during 2013. Here's how they looked:
- ATM withdrawals were capped, with some banks able to dispense only €100 at a time.
- Border police were able to confiscate anything above €10,000 being physically removed from the country (perhaps easier in an island nation like Cyprus than in Greece).
- Importers and exporters got a special dispensation for exchanging currency and transferring money to the rest of Europe — but they had to prove they were actually buying or selling something.
- Capital controls were initially imposed for a seven-day period. This has become a bit of a joke. Iceland also brought in "temporary" capital controls in 2008 that remain in place.
This would be an immediate stopgap solution for Greece, and there is an attractiveness to it. It really does what it says on the tin — if a country is experiencing rapid outflows of money, it stops them. More difficult will be reintegrating into the eurozone and lifting the controls.
Citi's Willem Buiter says Greece would have to look at an "alternative monetary arrangement" to the euro if a default caused the government to bring in capital controls. Basically, if the government defaults, Greece's national central bank (NCB), which owns a large proportion of Greek debt, would be left to fail because of the eurozone's strict rules about not sharing risks:
That irremediably insolvent NCB would cease to function as part of the Eurosystem and, although it could hang on for quite a while with capital controls, currency controls and the introduction of a parallel currency (scrip), the member state with the insolvent central bank would be eventually have to look for an alternative monetary arrangement.
So that would be a full-blown Grexit, perhaps whether Greece wants it or not.
The really brutal reality is that even if the negotiations are resolved (though that looks difficult right now), we're back to the same position in less than four months. Greece's support would last only until June, and the country has big payments to make after that, too:
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