Warnings Raised of a Greek Exit From the Euro

By LIZ ALDERMANMARCH 18, 2015

The New York Times

PARIS — Just a few weeks ago, fears that Greece might exit the euro union subsided when Europe extended its financial bailout. But as a new war of words escalates between Athens and its creditors, talk of a “Grexit” is heating up.

In the last several days, European and American banks, think tanks and ratings agencies have issued a fresh round of warnings and studies calculating the damage to the currency union if Greece were to default on its debts or stop using the euro.

Jeroen Dijsselbloem, the head of the Eurogroup body of European finance ministers, this week also raised the possibility of restricting the flow of money in and out of Greece to make sure the country has enough money to pay its debts.

Driving those concerns is an increasingly venomous standoff between Athens and nearly every other country in the 19-member currency union — especially Germany.

One of the main sticking points is Prime Minister Alexis Tsipras’s pushing ahead with an anti-austerity agenda that creditors say conflicts with pledges he made on Feb. 20 in winning an agreement to let Greece extend its 240 billion euro, or $254 billion, bailout program for four months. That deal was crucial to giving Greece the ability to unlock loan money it badly needs. But so far, no funds have been forthcoming.

On Wednesday, Greece’s Parliament approved a number of anti-poverty measures despite warnings from creditors that the legislation ran contrary to the overall package of changes Greece had agreed last month to adopt.

And it probably did not help Greece’s debt diplomacy that members of Mr. Tsipras’s Syriza party were among the thousands of European demonstrators in Frankfurt on Wednesday protesting, amid tear gas, European Central Bank policies.

Athens has become so politically isolated, even as its coffers run dry, that Mr. Tsipras will be trying to salvage relationships on Thursday and Friday in Brussels at a European Union summit meeting.

He has persuaded Chancellor Angela Merkel of Germany; President François Hollande of France; the European Central Bank president, Mario Draghi; and others to discuss the Greek crisis directly with him. Whether he will clinch a deal to unlock funds and prevent a wider crisis remains to be seen.

Europe has “an overwhelming will to keep Greece in the eurozone,” Pierre Moscovici, the European Commission’s financial affairs chief, told a German newspaper this week. But, he added, “we won’t keep Greece in the eurozone at any price.”

European leaders have fast run out of patience with Greece, especially after Mr. Tsipras last week renewed demands that Germany pay Greece billions in reparations from World War II. And Greece’s outspoken finance minister, Yanis Varoufakis, has reportedly alienated some of his eurozone counterparts by changing his position several times during negotiations.

Members of his Syriza party are also agitated over a recent opulent photo shoot of Mr. Varoufakis in the magazine Paris Match.

On Tuesday, Greece further angered its creditors by refusing to update them on progress it had made since the February deal to put in place economic changes required to free up around €7 billion in funds from Greece’s bailout program. Instead, Mr. Tsipras insisted on waiting to speak directly to Ms. Merkel and others about it in Brussels.

Without the bailout money, the Greek government has little cash left to meet payments owed to creditors for the rest of this month.

The government teeters precipitously close to a default. On Friday, Greece must reimburse €350 million in loans to the International Monetary Fund and roll over €1.6 billion in short-term debt.

Tax receipts have fallen by more than €1 billion since the Syriza party came to power in January. In the face of the cash squeeze, the state has said it might have to borrow money from national pension and farmers’ funds to avoid default, and withhold back payments owed to hospitals and other state entities.

Several of Greece’s largest companies are also privately complaining that the state has not paid them millions of euros owed for construction and other state contracts since December.

A number of large and medium Greek companies have started withdrawing cash overnight from their Greek bank accounts to banks in London, Luxembourg and elsewhere, and returning the money in the morning to finance their business operations, according to Athens-based analysts, bankers and Greek company officials aware of the transfers. All declined to speak for attribution.

The practice — which is legal and was last used widely by Greek companies and multinationals with Greek operations in 2012, when fears of a Greek euro exit ran high — is meant to protect the companies’ euro holdings in case capital controls are imposed overnight or over a weekend in Greece, or in the event of some other financial calamity, these people said.

Greek officials have insisted that capital controls will not be imposed in Greece — or will be applied only if the situation grows dire. But Mr. Dijsselbloem raised the issue again on Tuesday in an interview with BNR Nieuwsradio of the Netherlands, saying: “It’s been explored what should happen if a country gets into deep trouble — that doesn’t immediately have to be an exit scenario.”

He cited “radical measures” taken in Cyprus, where banks “were closed for a while and capital flows within and out of the country were tied to all kinds of conditions.”

Mr. Tsipras has insisted that Greece does not want to leave the eurozone, and European officials have chimed in to insist that the currency bloc must stay together. The ultimate goal is for Greece to get a €7 billion loan installment to tide it over until summer.

Greece would then hope to return as quickly as possible to borrowing in international financial markets so that it needed no further aid from its European partners, according to a senior Greek finance official, who was not authorized to speak publicly. But Greece would need to overcome a sizable credibility gap for that to happen — and to quell the Grexit talk.

Mr. Moscovici, in his interview with German news media, said a Greek departure from the single currency would raise the question of whether the eurozone could remain a viable currency union. “Everyone would ask, ‘Which member state is next?’” he said.

Last week, Fitch Ratings warned that the “eurozone would suffer a significant shock if Greece left.” The Moody’s ratings agency was more blunt. “Even if the immediate financial impact was limited, the exit of a member state from a union explicitly designed to be indivisible would inevitably raise questions about what pressures might cause other countries to take the same route,” it said in a new assessment.

Morgan Stanley analysts said in a research note on Tuesday that the faster that Greece’s situation deteriorates, the greater the chance it may exit the union. “The economy is now shrinking, tax revenues are falling short of targets, bank deposits are leaving the system and political volatility seems on the rise, both domestically and in the relations with official lenders,” the bank said. “We don’t think that Greece would want to exit the euro. Yet a misstep big enough may force the exit.”

But back in Athens, Mr. Tsipras remained defiant.

Addressing lawmakers before the vote Wednesday on a “humanitarian crisis bill,” which promises free electricity and food aid for thousands of very poor Greek families, Mr. Tsipras condemned “those who dare to write a letter and send it by email, describing the bill for the humanitarian crisis as a unilateral move.”

He was referring to a note that a European Commission official sent to Athens on Tuesday calling for further discussions of the proposed measure.

“They’re asking us to freeze legislation so that thousands of families without electricity can continue to freeze,” Mr. Tsipras told Parliament on Wednesday. “People have asked us to put an end to austerity and bailout agreements, to begin the process of reclaiming the dignity of the nation.”

Niki Kitsantonis contributed reporting from Athens.