A “Grexit” is officially on the table.
On Sunday, the latest draft from the Eurogroup outlining what Greece must do to restart negotiations with its European creditors on a new bailout surfaced.
The Financial Times posted the full draft here and the most important part is the end.
“In case no agreement could be reached,” the document reads, “Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring.”
In other words, we are now officially talking about a Grexit.
On Twitter, Karl Whelan, an economics professor at the University of Dublin who formerly served on the Federal Reserve board and as an economist at the Central Bank of Ireland, noted that this sentence about a “time-out” from the euro is a “huge sweetener designed to boost support for Grexit in Greece.”
Whelan added that the, “German strategy appears to be to set conditions that won’t be met and force Grexit.”
And as former UBS chief economist George Magnus noted on Twitter, a “time-out” is just an illusion: Once you’re out, you’re out. Either things will go well for the Greek economy outside the euro so they won’t need to rejoin, or things will go terribly, in which case the euro won’t want them back.
On Saturday, a paper presented at the Eurogroup — a collection of the 19 eurozone finance ministers — by German finance minister Wolfgang Schaeuble outlined a plan for Greece to put 50 billion of state assets to an external fund and to leave the euro for five years.
But given Germany is seen as the biggest hardliner in negotiations, this suggestion was seen at least as something the broader Eurogroup would not necessarily want to go along with.
Now, however, it looks like something similar is at least being contemplated if Greece cannot get the latest demands from its creditors through its parliament by Wednesday. And what’s more, getting parliament to sign off on these reforms only allows Greece to come back to the negotiating table its creditors; this would not clinch Greece a new bailout.
And to see how quickly things have gotten away from Greece, the plan that Greece presented on Saturday — which has now been rejected — was more or less the same plan that Greek voters rejected in a referendum last Sunday.
So basically Greece had a plan with its creditors but walked away from the plan, instead putting it to the Greek people in a vote. That vote came down in favour of Greece’s government rejecting the plan. Instead, Greece reoffered the same plan to its creditors. And now these creditors have rejected the plan.
Of course, with the situation in Greece getting more dire, the Eurogroup memo adds that, “The Eurogroup takes note of the urgent financing needs of Greece which underline the need for very swift profess in reaching a decision on a new [Memorandum of Understanding]: these are estimated to amount to EUR 7bn by 20 July and an additional 5bn by mid August.”
Greece owes the European Central Bank 3.5 billion euros on July 20 and another 3.2 billion on August 14.
Looming over this, however, is that Greek banks have been and remain closed, and the Eurogroup draft acknowledges that a buffer of up to 25 billion euros could be needed to recapitalize Greek banks.
But as the Eurogroup draft makes clear, there will not be haircuts on Greek debt — or Greece’s creditors getting back less than 100 cents on the dollar — as long as Greece is a member of the euro.
In exchange for promising to make its creditors whole over time, Greece has agreed to seemingly endless reform measures since its first bailout in 2010, and this latest drama is in a large sense more of the same.
What has been refused at every turn is any suggestion that Greek creditors would ever have to take a haircut, and this latest draft only discusses those haircuts as a possibility were Greece to leave the euro.
Writing in The Guardian on Friday, former Greek finance minister Yanis Varoufakis argued that the entire process outlined by Greece’s creditors — austerity, reforms, budget surpluses, and so on — did not add up, mathematically.
And Varoufakis recalled that at his first Eurogroup meeting, he was told by Eurogroup president Jeroen Dijsselbloem that there would be no debt restructuring (i.e. haircuts) under any circumstances.
Unless, it seems, those circumstances involve Greece leaving the euro.