Greece’s dance along the financial tightrope has kept markets, and investors, watching closely. Due dates come and go with no action, but with many threats and promises on both sides—that of the Greek government, elected by a populace sick of austerity measures, and that of the troika (the International Monetary Fund, the European Central Bank and the European Commission), determined to compel Greece to even sterner measures in exchange for additional rescue funds.
While some involved in the negotiations say progress is being made, others disagree, and markets roil accordingly—or not. Worries over a potential Greek default, or an exit from the euro, war with the belief of many that authorities will not allow such chaotic moves to occur—and the talks continue.
Most of its debt is not due this year, but Greece has to fork over a major payment to the International Monetary Fund by May 12. If it fails to reach an agreement with the troika that will allow it to access more cash, it will be in trouble—particularly since Athens continues to insist that it will not back off on salary and pension payments. That’s just one of the arguments with the troika.
Meanwhile, Greece continues to examine existing commitments with an eye toward compelling changes and making the terms more beneficial, or less stringent.
Here’s a look at some of the top ways that Greece’s stance is affecting markets.
1. Airport group could be affected.
Although the deal was hammered out in 2014, Greece is now trying to change the terms of an arrangement with a consortium led by German airport operator Fraport to lease 14 regional airports. That’s according to an anonymous source familiar with the deal, cited in reports, who said that Stefan Schulte, head of Fraport, had already met with the Greek government on the matter.
The $1.3 billion deal, which already had a spot at the table for Greek energy firm Copelouzos, did not previously include any participation by the Greek government, but that’s one thing Athens is now seeking—as well as a reduction by half of the number of airports involved in the deal. Since the current government rose to power in January, it’s already put the kibosh on a number of privatization deals, including the sale of the country’s largest port—although it’s since backtracked on some of those actions.
According to the source, while Fraport has expressed willingness to consider some involvement by the government, the challenge will be to arrive at terms that are agreeable to all the involved parties. The company had said earlier this year that the deal, which was originally expected to be completed by Q3 2015, now may take till the end of the year or even move to the beginning of 2016.
2. A Greek default could escalate Target2 liabilities.
Currently, under the Target2 system, euros created in any of the 19 euro zone countries move unrestricted throughout the currency bloc. However, if Greece defaults, that would open up the other 18 individual central banks in the euro zone, as well as the ECB, to losses. The ECB tracks the debt of euro zone countries to one another, and Greece already owes more than 40% of its economic output to other euro zone countries.
So say Greece defaults and can’t pay what it owes to the ECB. Suddenly, the ECB can’t pay any of the other member central banks their share of whatever Greece may owe them—whether for goods it’s imported from other countries or for some other purpose.
And if Greece is cut off from additional rescue funds from the troika, which is the most likely scenario in the case of a default, it has no way to pay up and other nations, and their banks, are left holding the bag.
3. A Greek default could trigger defaults among Greek companies.
If Greece defaults, a number of Greek companies would probably do likewise. In addition, their overseas assets could be subject to seizure by creditors, although after so many years of fiscal woes there likely aren’t all that many to seize.
In addition, domestic Greek companies would likely find credit tightened or cut off, making a tough situation even tougher both at home and abroad.
4. The EFSF bond offering could take some heat in a default, but probably not much.
The European Financial Stability Facility launched a bond offering in April that did surprisingly well, considering that Greece owes it money. Greece’s own bonds are trading at huge yields, while the EFSF’s bonds actually came in at a negative yield.
If Greece defaults, it would not mean the EFSF would in turn default. Instead, the other countries that participate in the EFSF guarantee—it’s not funded up front, as was the European Stability Mechanism; instead, member countries guarantee its solvency—would have to step up to the plate. But considering that the EFSF is Greece’s largest creditor, that would mean other countries would be on the hook to cover Greece’s missed payments.
5. The ECB could tighten Greece’s use of emergency funding.
ECB staff have put together a plan to increase the haircut on any security Greek banks might offer to get emergency funding, although putting that plan into practice may not happen till the last minute—which could be too late for Greece to cobble together a payment.
At press time the measure was still to be discussed by the ECB Governing Council. But should such a plan be implemented, it would reduce the value of any security that Greek banks can offer, making them qualify for less Emergency Liquidity Assistance because of insufficient collateral. And that in turn could escalate the situation.
6. There could be snap elections.
The Greek government is considering holding snap elections or a referendum if bailout talks fail, according to Greece’s deputy Prime Minister Yannis Dragasakis.
Dragasakis said in reports that if creditors and Greek negotiators cannot come to an agreement, those possibilities are “at the back of our mind, as options to seek a solution, in case of deadlock.” Prime Minister Alexis Tsipras said in reports that if lenders demand conditions his government finds unacceptable, since it was elected expressly to abandon austerity, it would be put to a referendum to give the people a say because such terms would be “outside our mandate.”
7. Fitch says ECB response to missed payment is key.
Fitch Ratings said in research that the outcome of a missed Greek payment to the ECB would “be key.”
According to the ratings agency, “ECB decision-making is a greater potential constraint than collateral availability…. The ECB has considerable flexibility in how it interprets the rules under which it may continue, limit, or discontinue further access to ELA. Cypriot banks were not cut off from the ELA in 2013 despite concerns about bank solvency, although the ECB did make ELA extension conditional on Cyprus entering an EU/IMF program. The ECB’s response for Greece is likely to be tied to the progress of discussions between the Greek government and its European partners.”
Douglas Renwick, senior director, sovereigns at Fitch, said in a report, “A missed IMF repayment would not itself constitute a sovereign rating default (we assume the EFSF would not exercise its right to declare one of its loans to Greece due, triggering a cross-default clause in many privately held bonds) but could lead to a further sovereign downgrade. The increased risk of capital controls led us to lower our Country Ceiling for Greece to ‘B-’ from ‘BB’ in March.”