Wednesday, June 24, 2015

What defines Greek default? | Machiavellian machinations in the ECB

Our discussions on matters economic with a senior figure in the insurance industry raised an intriguing question recently. It is this: in relation to the difficulties that have beset Greece and its relations with the ECB and the IMF, and given that the Greek government has already missed a scheduled payment to the IMF, how would a default in this instance be defined?

There have been many defaults by countries, but the most significant one in the recent past was when Russia refused or was unable to honour its commitments to the holders of its sovereign bonds in 1998. In that case it was adjudged to be in default, and that judgment call was made by the international rating agencies.

Greece’s case now is somewhat different to Russia’s then. The latter had to rely on its own indigenous money, the Ruble, while the government of Mr. Tsipras et. al. is using legal tender that belongs to a currency union, comprising of 17 other sovereign states as well as itself, from whom it has borrowings which are essentially related to the support of said common currency. True, it also has borrowings from the International Monetary Fund, but already some sleight of hand has been apparent here, as when it was able to repay one loan installment by using funds that were already on deposit with the IMF at the time. And the fact that Greece missed a recent IMF payment, which it was legally able to roll up into a larger, but later, commitment, without triggering a default, indicates that much more could be possible in this regard.

Machiavellian machinations in the ECB

The famous (or infamous) medieval political observer, Niccolo Machiavelli, wrote in his major work, “The Prince”, that anything can be rationalised after the event, provided always that the parties to it are able and willing to carry it out. There is evidence that the brinkmanship being indulged in by the Syriza government in Greece, where it is depending on the unwillingness of the leaders and other members of the Eurozone to allow the precedent of a member leaving the union, could well be based on a pragmatic understanding of the situation. But where is the rule that says a member state must leave the Common Currency because it has failed to repay a loan to the ECB (and Mario Draghi is always adamant that his organisation is a rule-driven one)?

The real sanction that the central bank has to hold against Greece is the advancement of new funding, which it has been withholding pending Greece fiscal reforms. However, it has been withholding those funds for over a year, and there is no reason why it cannot continue to do so.

The ECB, the EU Commission and the core EU states, of course, are walking a tightrope of their own, because any perceived concessions to Greece will almost certainly trigger disruption in other Eurozone states.

A lot will depend on the rating agencies. Already, it has been suggested that unpaid loans to the IMF and the ECB, which can hardly be described as normal bondholders, could be outstanding for quite some time before S&P, Moodys and / or Fitch would call a default.

And it might be instructive to remember that the above mentioned Machiavelli was a countryman of the ECB president, Mario Draghi.

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