Greece Struggles to Make Debt Math Work in Bailout Standoff

by Nikolaos ChrysolorasRebecca ChristieVassilis Karamanis

12:34 AM EET

March 5, 2015

(Bloomberg) -- As talks over the disbursement of bailout funds for Greece drag on into their seventh consecutive month, the deadlock threatens to pull the country back into a recession this quarter, or even a possible default within weeks.

Greece needs to refinance or repay about 6.5 billion euros ($7.2 billion) in debt and interest in the next three weeks, including Treasury bill redemptions, according to data compiled by Bloomberg. To top that, its budget forecasts a 2.1 billion euros cash deficit in March. A tax-revenue shortfall opened a hole of 217 million euros in January, derailing budget targets.

Having lost market access, Greece’s only lifeline is emergency loans extended by euro-area member states and the International Monetary Fund. Failure to secure an agreement with them on the disbursement of funds has triggered a liquidity squeeze, raising doubts about the country’s solvency, as well as the sustainability of its nascent economic recovery.

“There’s no chance the quarrel won’t affect the economy” said Haris Theoharis, a lawmaker for Greece’s River party and a former secretary of public revenue. “Every investment has been put on hold, pending the result of the talks,” he said by phone on Wednesday.

Greek Finance Minister Yanis Varoufakis said that the country has an alternative plan to plug its financing shortfall in March, without specifying what it was.

“We go into the negotiations with optimism, with especially good preparation, and I believe there won’t be a development,” Varoufakis said in Athens, on Wednesday. The answer to the question of whether “there is an alternative is that there is one,” he said.

Paris Talks

Investors have shown confidence a solution will be found. Greek bonds have delivered a 3.4 percent return this year, among the best returns out of 34 sovereign indexes tracked by Bloomberg. The benchmark Athens Stock Exchange General Index has gained 2.8 percent this year.

Greece’s month-old anti-austerity government led by Prime Minister Alexis Tsipras has yet to agree with its creditors on the terms for the disbursement of an outstanding aid tranche totaling about 7 billion euros. Negotiations that started in Paris in early September between the previous government and the troika of the European Commission, the IMF and the European Central Bank didn’t yield any results. A snap election in January put an abrupt end to the talks.

Two officials directly involved in Greece’s 240 billion euros bailout said the country could potentially use its available reserves to make it past the end of this month. A third official said Greek financing needs, including debt repayments to the IMF, are only safely covered for another two weeks. The officials asked not to be named while negotiations continue. A spokesman for Greece’s finance ministry declined to comment on when the country may run out of cash.

Pension Reserves

Greece’s government has so far been covering its cash deficit by tapping the reserves of public entities, including pension funds, hospitals, and universities. It also rolls over treasury bills, forcing Greek banks to make a choice between participating in liquidity-draining auctions or letting their sovereign default.

Greece’s biggest pension fund, said in a statement Wednesday that repurchase agreements with the central government are not an extraordinary event.

Reports to the contrary “do not contribute positively in this crucial period for the economy, and exacerbate climate of insecurity and uncertainty among Greek pensioners,” IKA said.

The internal recycling of reserves to tap liquidity shortages is not always benign.

Cash Recycling

“When short of cash, governments increase their arrears, delay tax rebates, and hold public investment payments,” said Panos Tsakloglou, a professor at the Athens University of Economics and Business.

In the case of Greece this asphyxiation, if prolonged, could dampen economic growth, he said.

Uncertainty over Greece’s financing amid a protracted standoff with creditors over the terms attached to the country’s bailout, has already taken its toll on the economy. Greece’s gross domestic product shrank in the last quarter of last year after nine months of growth, and a purchasing managers’ index showed manufacturing activity kept contracting in the first two months of 2015 and depositors withdrew about 20 billion euros from the country’s banks.

As Greece prepares for a repayment of 300 million euros to the IMF on Friday, which will further deplete its buffers, creditors warn that no bailout disbursements will be made unless the new government meets economic reform milestones. “Before any money flows we need to check whether Athens meets the agreed terms,” German Finance Minister Wolfgang Schaeuble said in a Wednesday interview with Stuttgarter Zeitung.

Debt Repayments

Greek banks’ exposure to treasury bills has already reached the limit acceptable to regulators in Frankfurt, and won’t bailout the government with more short-term notes, unless the ECB allows them.

Prime Minister Tsipras called Bank of Greece governor Yannis Stournaras ahead of an ECB Governing Council meeting Thursday, asking him to contribute to the restoration of liquidity in the Greek economy “through all available means,” a government official said in an e-mail to reporters.

The clock is ticking for Europe’s most-indebted state. Greece needs to refinance treasury bills totaling 1.6 billion euros next week, and pay about 420 million euros in IMF amortization and interest on its debt. The bill rises to 3.1 billion euros the week after, of which 913 million euros are due to the IMF.

Even if the Greek state somehow manages to pay its bills this month without a bailout tranche, the country’s private sector, in which more than a quarter of the workforce is without a job, may not be resilient enough to withstand a long delay.

“The standoff hurts the most productive sectors of the economy,” Theoharis said.

To contact the reporters on this story: Nikos Chrysoloras in Athens at nchrysoloras@bloomberg.net; Rebecca Christie in Brussels at rchristie4@bloomberg.net; Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Vidya Root, Heather Harris