Default piles pressure on Greek banks, other borrowers

GREECE'S widely expected 1.55 billion euro default on an International Monetary Fund (IMF) loan raises the pressure on its banks and other borrowers.

Analysts say the collateral of banks and borrowers is likely to receive a "haircut", that is, the value of the collateral against the borrowings will be downgraded. The implication is that stressed banks and other corporate borrowers will have less scope to borrow money from the European Central bank (ECB) and other lenders.

The rate of interest on the borrowings and bonds will rise to reflect the risk; as an indication, the yield on two-year Greek debt has soared from 23 per cent to 37 per cent in weeks.

In the days before the default, rating agency Fitch, for example, had downgraded Greek sovereign to "CC", citing the country's breakdown in talks and the threat of a "disorderly" exit from the eurozone.

In Athens, the government has made yet another change to its position, telling its creditors it is willing to accept many of the terms of a bailout package that it had earlier rejected - if they are part of a broader deal to address the country's funding needs for the next two years, officials said on Wednesday.

In a letter sent on Tuesday to the creditors - the European Central Bank, the IMF and other eurozone countries - Prime Minister Alexis Tsipras said Greece was "prepared to accept" a deal set out publicly over the weekend by the creditors, with small modifications to some of the central points of contention on issues such as pension cuts and tax increases. He linked Greece's acceptance of the terms to a new package of bailout aid that would need to be negotiated.

Chancellor Angela Merkel of Germany rejected further negotiations until Greece holds its referendum on Sunday on whether to accept the terms of a previous offer from the creditors - a vote that many European leaders are hoping will amount to a rebuke of Mr Tsipras.

However, European markets and Wall Street reacted positively to the latest Greek proposal. Frankfurt's DAX 30 climbed 3.06 per cent to 11,279.86 points and the CAC 40 in Paris, by 2.81 per cent in value to 4,924.73; London's benchmark FTSE 100 index rose 1.49 per cent, and Wall Street jumped in opening trade on Wednesday, with the Dow at 17,776.78, up 157.27 points five minutes after the opening bell.

The official figure for ECB emergency lending so far has been 89 billion euros (S$134 billion), but analysts say ECB and Greek Central Bank loans have reached as much as 113 billion euros in recent weeks due to the frenzied run on the banks. Over and above this amount are 20 billion euro Greek bonds, which the ECB holds.

Greece, the first developed nation to default on an IMF loan, now joins a motley group of third-world states, including Zimbabwe, Somalia, Sudan and Peru, which have failed to make their commitments to the world's "lender of last resort".

The IMF said: "We have informed our Executive Board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared."

But its spokesman Gerry Rice said the IMF had received a request from the Greek authorities for an extension of Greece's repayment obligation, which will go to the IMF's Executive Board in due course.

In other default instances, nations have been given a 30-day grace period to repay. Already, considerable criticism has been directed at IMF head and former French finance minister Christine Lagarde for not being objective and distant from eurozone creditors.

An economist said after meetings in Brussels: "The IMF is supposed to mend fences and aid stressed nations. Instead, Ms Lagarde's comments have added to the fractious mood."

Greece's total debt amounts to 324 billion euros, mainly to European Union (EU) and other states (see table). The country's debt-to-gross domestic product (GDP) ratio is 177 per cent, the economy has contracted by 25 per cent since 2010 and recession is likely to deepen because of the banking shutdown, slide in tourism and uncertainty. Unemployment is at 26 per cent, and youth unemployment, 53 per cent. Greek businesses which wisely placed money in foreign banks continue to trade and that, at least, is a positive factor, but millions of families are either in poverty or close to the poverty line.

Der Spiegel reported that Germany's exposure to Greece's borrowings, estimated at 69 billion euros, could jump to 86 billion euros if Greece leaves the euro.

In practice, however, loans are to be repaid over 35 years, so the annual exposure would be only 3 billion euros.

This is one of the reasons critics of the creditors, such as Brendan Brown, London economics head of Mitsubishi UFJ Securities International and author of the book Euro Crash, have said that some debt forgiveness would have brought about agreement.

Greek Prime Minister Alexis Tsipras and Finance minister Yanis Varoufakis have also been criticised for announcing the referendum and ending negotiations.

A trader, attempting to fathom their strategy, said: "They could have played the game and continued with unfulfilled promises. Instead they not only overplayed their hand, but tipped over the poker table. Now, all they are left with is a shattered banking system and economy."

This article was first published on July 2, 2015.
Get The Business Times for more stories.