Greece The way ahead - Economist

July 11, 2015 at 2:24am

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http://www.economist.com/news/leaders/21657394-deal-between-greece-and-its-creditors-would-be-best-if-there-has-be-grexit-here?fsrc=scn/tw/te/bl/ed/thewayahead
Greece
The way ahead

A deal between Greece and its creditors would be best. But if there has to be a Grexit, here is how to do it
Jul 11th 2015
Timekeeper

IN A crisis studded with missed deadlines, Sunday July 12th really could mark the denouement of the Greek debt drama. The leaders of the euro zone along with those of all the EU’s 28 member countries will gather for a set of meetings in Brussels. If Alexis Tsipras, Greece’s prime minister, can strike a deal with his creditors that day, his country will stay afloat inside the euro. If there is no such deal, Greece is heading inexorably towards the whirlpool of Grexit. Donald Tusk, the president of the European Council—a Pole not prone to hyperbole—calls it “the most critical moment in the history of the EU”.


All sides insist that their aim is not to eject Greece from the euro, but rather to find a way to keep it in. But the more honest European politicians admit that the likelihood of Grexit has never been higher. Betting now puts it at around 50%. Shockingly, for something so imminent, probable and with such dramatic consequences, there has been remarkably little public debate about how Greece would leave the euro. The best outcome for Europe would still be a deal on July 12th that keeps Greece in. But it is also time to make contingency plans for the sort of Grexit that does the least harm.


In principle, a deal between Greece and its creditors should not be hard. The reforms Mr Tsipras promises are tantalisingly close to those demanded by the other euro-zone countries and the IMF. No one, from Angela Merkel, Germany’s chancellor, to Mario Draghi, the president of the European Central Bank (ECB), wants to be held responsible for pushing the Greeks out. The need for debt relief, the totemic issue for Mr Tsipras, is underscored by the IMF, and—privately, at least—acknowledged by most European politicians who can count. Rational self-interest should also push both sides towards a deal. Grexit will hit Greece’s economy harder than staying in and it will cost the creditors a lot more money. If it leaves the euro, Greece will not just default on its loans from European governments but also its liabilities to the ECB. The total—€340 billion ($375 billion) or more than 3% of euro-zone GDP—is far more than the relief needed to make Greece’s debt burden sustainable.

But rational actors would never have got this far. The Greek government’s erratic behaviour—it arrived at a last-ditch meeting this week with old, handwritten proposals—and its inflammatory statements have generated the sort of ill-will that can make small obstacles insurmountable. Germany’s attitude towards debt repayment has its roots in moralising sermons and an obsession with rules rather than economic self-interest. Political constraints bind, too. Mr Tsipras cannot shout defiance in Athens one week, and roll over in Brussels the next. If northern European taxpayers voted on whether to hand money to Greece without conditions, they would vote No, too. For all these reasons, the meeting on July 12th could well fail.

What then? Greece will probably drift towards Grexit by default. Banks will stay closed. One member of the ECB governing council has said emergency liquidity will be cut off on July 13th. Without cash to pay wages and pensions, the Greek government will have to issue IOUs, which will quickly become an informal parallel currency, trading at a huge discount. From essential medicines to energy, there will be shortages of vital imports. A new currency will be introduced amid chaos.

Some of that chaos can be avoided, but doing so will demand forward planning and generosity from the creditors, two virtues that have been in short supply. One task is to clarify the legal uncertainties. (Is Greece permanently out of the euro or just temporarily issuing IOUs? Can it remain in the EU if it is not in the euro?) The second is to ensure that an exiting Greece has both the policies to stabilise its economy and avoid high inflation and the cash to pay for critical imports.

Pulled by the current
Some Europeans suggest the legal tangles of Grexit can be avoided by pretending that Greece is not actually leaving. Wolfgang Schäuble, Germany’s finance minister, has spoken of a “temporary” Grexit. If the Europeans allowed the Greeks to issue scrip or temporarily to introduce an emergency parallel “currency”, Greece might in effect suspend its membership of the single currency without technically leaving (see article). Such a non-Grexit exit would allow European politicians to put off pesky problems such as how to deal with the losses on the ECB’s balance-sheet. Technically, it could also be reversed if Greece struck a deal with its creditors at a later date.

This halfway house might buy time, but it cannot be a permanent solution. And the longer Greece lives with such a dual currency, the less likely it is to return to the euro. But even if the door to the euro zone closes, other doors need not. Greece should be allowed to stay in the EU. Domestic support for Mr Tsipras since his election in January has been animated above all by a sense that Greece’s dignity has been trampled upon. The humiliation of Grexit would be compounded if Greece found itself cast out of the wider union as well. EU law is woolly on the subject, but preserving easy access to European markets for Greek exporters and visa-free access to Greece for European holidaymakers would be a huge boost to the post-lapsarian Greek economy. It would also enable EU funds for poorer regions to keep flowing and help prevent Greece from becoming a failed state on the EU’s flank.


The Greek crisis, in Economist covers
To maximise its chances, Greece would need to match a euro exit with budget discipline and an independent central bank credibly targeting low inflation. Europe should provide humanitarian aid and balance-of-payments support for the fledgling drachma. This could either be direct (just as the EU helps Ukraine) or more creative—for instance, euro-zone states could put themselves at the back of the queue of Greece’s creditors, helping the country tap private markets again.

The irony is that the new lending and debt-forbearance by Europe needed to prevent Grexit from causing a catastrophe are the elements needed to keep Greece in the euro. Equally, a sundered Greece would have to resort to much the same austerity it is resisting. That is all the more reason for both sides to cut a deal. But it is no excuse to put off planning for the worst.

Xiao Gang: chairman of China’s embattled markets regulator - Financial Times

July 10, 2015 at 4:10pm

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July 9, 2015 9:29 am
Xiao Gang: chairman of China’s embattled markets regulator
Tom Mitchell in Beijing


Xiao Gang, chairman of Bank of China Ltd., speaks during a news conference in Hong Kong, China, March 22, 2007. The Bank of China, the nation's second-largest, reported second-half profit more than doubled, buoyed by a tax credit and rising demand for loans in the world's fastest-growing major economy. Photographer: Maurice Tsai/Bloomberg News©Bloomberg
Xiao Gang, the head of China’s embattled stock markets regulator, is a central bank veteran who has played a crucial role in the reform of the country’s banking sector.
Mr Xiao, 57, left the People’s Bank of China to run the Bank of China group for a decade from 2003, a period that included its initial public offering.

Over that period BoC and other state banks, which according to the World Bank in effect control about 95 per cent of China’s bank assets, went from being basket cases with crippling non-performing loan ratios to global powerhouses that spurred China’s growth through the depths of the global financial crisis.
“The whole world benefited [but] there was an irony,” Hank Paulson, the former Goldman Sachs chief executive and US Treasury secretary, told the Financial Times in a recent interview. “The US was supposed to be the [world’s economic and financial] model and then the Chinese banks, which had been defunct 10 years earlier, suddenly were this engine of growth.”
Fred Hu, another former Goldman Sachs banker who worked closely with Mr Xiao on BoC’s IPO, describes the head of the China Securities Regulatory Commission as a “very smart, diligent and cool-headed regulator”.
Despite never having studied abroad, Mr Xiao decided to give his presentations during BoC’s crucial international roadshow in English, staying late in the office to read English-language finance books and absorb BBC and Bloomberg TV broadcasts. “He was very determined and absolutely disciplined,” Mr Hu recalls.
But his move to CSRC in March 2013, as part of the new leadership team headed by President Xi Jinping and Premier Li Keqiang, was not without its shocks, according to another person who has dealt with him.
In addition to suddenly finding himself in a much more politically charged job, the institution he inherited was nowhere near as sophisticated as the one he had just left — a fact that could explain why the CSRC’s response to China’s markets meltdown has not seemed particularly cool-headed.
“Coming from a fairly commercially astute global bank with Chinese characteristics such as Bank of China to CSRC was like going from a very good, sophisticated Beijing restaurant to something out in the sticks somewhere,” says the person, who asked not to be identified.
Chart: Chinese equities
“Xiao understands markets and is very experienced, but now he has an organisation whose staff don’t have the experience and advantages he’s got and don’t necessarily see things the way he sees things.
“His levers to get things done and make things happen simply aren’t the same,” the person adds. “That would be a real challenge and struggle for anyone. At the same time he’s in a very political position, which is very difficult.”
People who have met Mr Xiao also describe him as quiet, low-key and humble.
“He is unique among Chinese officials in that he has a sense of humility,” one person says. “So many officials think China is on top of the world. But Xiao Gang is eager to learn best practices from abroad.”
Humility and global best practices are two things Mr Xiao will need plenty of as he attempts to steer Communist China safely out of worst markets crisis it has faced since first embracing capital markets reform in the early 1990s.

What the new Greek drachma would be worth - Fortune

July 9, 2015 at 12:49am

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What the new Greek drachma would be worth

by Stephen Gandel @stephengandel JULY 6, 2015, 1:59 PM EDT

A drachma plunge might not be as bad as some people think.

Greek drachma might not be as worthless as people think.

We may still be a ways from finding out. Even after Greeks voted “No” to a European bailout package that would have placed new restrictions on its economy, it’s not clear the country will leave the euro. Greek Prime Minister Alexis Tsipras says it won’t, and negotiations will continue on Tuesday.

But many others don’t see a way around it. European leaders are unlikely to forgive the country’s debt without new austerity measures. The vote suggests the Greek people don’t want that. So going it alone may be the only answer.

Drachmas, the Greek currency before it joined the euro, haven’t been around for a while. They were officially phased out in 2002, but the transition took time. And the last of the currency was not not officially converted until 2012. Presumably, if Greece were to leave the euro, all of the money in Greek banks would be converted back to drachma. Putting aside the difficulty of switching over a country’s currency, the big worry is that those new drachma would be worthless.

The value of the drachma would definitely fall, but perhaps not as much as people think. And it may not fall as much as it potentially would have if Greece had exited the euro a few years ago, when its recent debt problems surfaced.

A lot goes into pricing a currency, which is normally done by traders in the market, but there are two basic components. The first: How much a country produces versus how much its people consume. This is a country’s current account. The larger a country’s currency account deficit, the more it has to borrow so it can get more of other country’s currencies and less of its own. That’s why the current account can cause a country’s currency to fall—or rise, if it has a current account surplus.

Greece does tend to do a lot of importing. But there’s good news here. Nomura’s Jens Nordvig, one of Wall Street’s top currency strategists, says that if Greece had exited the euro in late 2011, when such a move seemed possible, the drachma would have likely plunged 30% based on its currency misalignment with other nations. Since then, Greece’s economy has plunged, which, from a currency perspective, is good news, at least in part. The Greek people can afford far fewer imports than they used to. So, Greece’s current account has swung from a deficit of nearly 10% of its GDP in 2011 to a current account surplus of just over 3%.


Meanwhile, the value of the euro has fallen in the past three-and-a-half years, by around 15%. Put those two factors together, and the result, at least according to Nordvig, is that based on its current account alone, Greece’s new drachma would only have to fall about 7% for it to be realigned with other nations. Not bad.

But the currency account is only half of the equation. The other half is expected inflation. And that doesn’t spell such good news for the drachma. It is assumed that, after Greece breaks out of the euro, the nation’s central bank will do what it can to boost its economy. That likely means driving down interest rates and printing lots of money. That will lead to a rise in inflation. The county is also likely to default on its international debts, which are priced in euros. That will hurt the value of the drachma as well. What’s more, Greece historically has had higher inflation than other European nations.

Add it all up and Nordvig puts the implied annual inflation of Greece at 8.6%. That’s not great. The U.S.’s inflation rate has been below 2% for a while, and it has been around zero for most of this year. Still, 8.6% is far from “wheelbarrows full of money” bad. Assume Greece gets its inflation problems under check in five years, which is a long time in the world of currency, then, based on inflation, the new drachma could plunge 43%.

So, if drachmas started at one drachma per euro, Nordvig predicts the conversion rate would quickly plunge to two to one. That could be generous, of course. Brazil, for instance, has a similar inflation rate to what we would likely see in Greece. Its currency trades for nearly 3.5 reals to one euro. But Brazil’s current account deficit was recently just over 4% of its GDP.

While a currency devaluation will certainly be painful for the Greeks, it will eventually give the country an economic boost, making its exports cheaper. For Greeks, local goods are also likely to be considerably cheaper than imports. Roger Bootle, the founder of London-based markets and economic analysis group Capital Economics, has estimated that a one off 30% devaluation in Greece’s currency will boost the nation’s economy by 20%. That’s likely to help Greek currency in the future. So, as long as Greek banks don’t fail, another lurking problem, the drachma could be better off than many think.

Greece debt crisis: Readers’ questions answered - Financial Times

July 8, 2015 at 2:20pm

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July 7, 2015 4:42 pm
Greece debt crisis: Readers’ questions answered
Martin Sandbu


After Greek voters on Sunday rejected the bailout terms proposed by international creditors, the FT’s social media audience has been asking a lot of questions about Greece’s debt crisis. Our economics writer Martin Sandbu answers some of them.
Do you think a solution can be found to save the face of both positions?

For the creditors, they need to be able to justify a debt restructuring to their voters. I think they can, if they emphasise two things. The first is that the Greeks will not get “new money” — it is only a question of giving them more time to pay back. This requires the debt restructuring to eschew nominal “haircuts” and focus on very long repayment extensions at very low interest rates. The second is that the International Monetary Fund now explicitly demands a restructuring. So the eurozone creditors can “blame” the IMF and explain to voters that they needed to compromise with the fund.
Could this be done in a face-saving way? I think so. For Greek prime minister Alexis Tsipras, the landslide in the referendum has brought political capital he can afford to spend. Firing Yanis Varoufakis as finance minister is a step in that direction. If Mr Tsipras gets the sort of agreement I outlined in a previous post, he can wave the debt relief in front of his voters and say their defiance paid off and that he can recommend this honourable compromise in the spirit of constructive collaboration with the creditors.
Would a Grexit cause a domino effect and would other countries exit the eurozone?
In the short run, a domino effect can be staved off. It is clearly the intention of leaders of other euro countries to quarantine Greece and to protect other vulnerable members from immediate market contagion.
The greater danger is in the long run. If one country has left the euro, it will be forever impossible to claim that an exit cannot happen. Markets will always price in a possible euro exit — and with a higher probability than before over the long run. So financing costs for the periphery will go up, in the best-case scenario.
The worst case is a return of the self-fulfilling runs on countries that we saw in 2010-12. It is worth remembering that these were not just about the risk of sovereign defaults, but about the risk of countries leaving the euro.
Can Greece ever balance its budget — ie bring in enough taxes to cover domestic expenditure?
Greece’s primary government budget balance has been in (small) surplus since late 2013. The discussion is all about getting more taxes in, or cutting spending, to service the debts.


If there is no bailout deal would we see hungry riots in the streets of Greek cities?
It is quite hard to predict what happens without a bailout deal as it depends on what is done next. In particular, does the European Central Bank continue to limit liquidity in the Greek banks? If so, and if the banking system is not restructured to start working again (like in Cyprus), then the government will probably choose to restore a national currency in some form.
Global Insight

IMF could help save Greece from the abyss

It may be time for fund to look at rule book and consider following its own advice

That does not have to be a catastrophe — countries change currency regimes from time to time — but it would be a huge disruption to the economy. But so is having to live without functioning banks.
The better option, which can be pursued even if the government is in default, is to restructure the banking system and for the ECB to give it access to liquidity again. Even if that means people suffer a haircut or “bail-in” of parts of their deposits, it would allow economic activity to resume.
Is Greece better off going it alone? Won’t they have cheaper exports in long run out of euro?
They may or may not have cheaper exports: a new currency will probably be highly inflationary, so it is an open question how much prices will fall when measured in international currency.
Also note that selling your exports more cheaply only makes you better off if you can expand your sales enough to make up for the lower price — otherwise you are only impoverishing yourself. And as it happens, Greece has undergone a strong “internal devaluation” already, with prices and especially wages falling significantly even if the exchange rate to the rest of Europe is by definition fixed. But this has not boosted exports.
That suggests the Greek problem is not so much one of price competitiveness but one of markets that are slow to adjust to whatever price changes do take place — exporters have not expanded even if their costs are lower. It is not clear why leaving the euro would, by itself, change that.
If there is no bailout deal, how should the Greek government restore its financial system and restart the economy?


What happens when the money runs out?

How long can Greece’s banks survive the current political turmoil?
The best solution would be to reach an understanding with the ECB and what it would take for the central bank to let liquidity flow freely again. The ECB restricts liquidity to Greek banks on the basis that it is risky to lend to them (but as I argued in my post “ECB, enemy of the euro?”, the ECB’s actions are part of why Greek banks are shaky).
There should be a way to restructure the Greek banking system, and splitting their assets and liabilities into “bad banks” and “good banks”, so the ECB would be prepared to give the good banks whatever liquidity they need. Then sound and functioning banks could open and economic activity could restart.
Is there a similarity between the financial crises in Greece and Puerto Rico?
Yes, there is, but the differences are very instructive. Both crises come from the combination of borrowing too much with the inability/unwillingness to write them down when growth falters.
In depth


Greece debt crisis
The anti-austerity government in Athens scored a victory as voters backed its call to reject a compromise with international creditors, but this has raised serious doubts about the country’s ability to remain inside the eurozone
Further reading
In the Greek case, having the euro means you cannot write down debt through a devaluation, and neither Athens nor the rest of the eurozone nor the IMF had the stomach from an explicit writedown in 2010.
In Puerto Rico, devaluation is also not an option and the legal system does not give it the kind of sovereignty which would permit a unilateral writedown.
But here is the difference: there is no clampdown on banking services in Puerto Rico. That is because the Federal Deposit Insurance Corporation takes over insolvent banks, restructures them and reopens them swiftly. The eurozone has not done the same in Greece. I recommend a column by Daniel Gros on this.

Greece vs. Germany: Two Competing National Narratives - Wall Street Journal

http://www.wsj.com/articles/greece-vs-germany-two-competing-national-narratives-1425591266?mod=e2fb

Greece vs. Germany: Two Competing National Narratives
One reason behind the bitter turn in Greek talks is how the two countries view themselves

By STEPHEN FIDLER
March 5, 2015 4:34 p.m. ET

The tone of Europe’s political debate about keeping Greece afloat has turned bitter, particularly between Germans and Greeks. One important reason is the stories the two nations are telling themselves about their own recent history.

Germans see themselves as having built economic success from the ashes of World War II through self-sacrifice, personal reliance and hard work. When their economy started to underperform in the 1990s, they enacted a series of tough overhauls more than a decade ago that laid the platform for economic strength today.



For many Germans, there is an element of morality here. Their virtue has been rewarded, as it would be for others if they followed the same wise course. Germans’ view of Greece is informed by the popular view of themselves: Small wonder that a country that has chosen the opposite course of profligacy, debt dependence and irresponsibility finds itself suffering an economic disaster.

On the other hand, Greeks have seen themselves as victims of foreign interference since the country was a part of the Ottoman Empire. Kevin Featherstone, professor of Greek studies at the London School of Economics, says there is an “enduring history of a sense of victimhood” that has been in evidence from the origins of the modern Greek state to the present day.

That hasn’t been German-specific. But it is overlaid on the experience of World War II. “There is a family memory of the severity of German occupation of Athens in the 1940s. It was one of the more brutal in Western or Southern Europe,” Mr. Featherstone says. Old people remember family members literally starving to death.

That sense of Greeks as victims of foreign intervention has carried through to the current debt crisis. From this perspective, Greece’s problems are caused not by the excess borrowing that predated the crisis but by the terms of the bailout imposed afterward to make sure German and French banks were repaid in full. In Mr. Featherstone’s view, the narrative is being manipulated by the government of left-wing Prime Minister Alexis Tsipras.
These narratives can be challenged. Germany’s economy isn’t a universal model because not every country in the world can run a trade surplus of 6% of gross domestic product. Some countries need to import.

Moreover, Germany’s major overhauls of a decade ago came at a time of reasonable global growth—and a relaxed fiscal environment because Germany was allowed to ignore the eurozone’s budget rules. West Germany’s growth was built on a platform created after World War II by the victorious Allies, who pumped in money and forgave its debts. Among the signatories of the 1953 London conference that eased the German debt burden was Greece.

The Greek narrative of corrosive foreign intervention also has its challengers. Great-power support for Greece during its War of Independence in the 1820s can be seen as the first liberal humanitarian intervention.

The 19th-century construction of the Greek state—by Bavarians—built its institutions, brought in its law code and separated the church from the state.

British intervention in Greece’s savage civil war in the late 1940s to ensure victory for the anti-Communists—still a source of controversy—left Greece as the only non-Communist country in the Balkans and paved the way for years of growth as rapid as Japan’s.

The predecessor of the European Union, which admitted Greece into the fold in 1981, five years before Spain and Portugal, pumped billions into the country.

“These interventions have been objectively positive for Greece,” argues Stathis Kalyvas, a professor of political science at Yale University. “Modern Greek history is a history of being bailed out,” he says. By contrast, the Germans “aren't used to bailing others out.”


The idea that Greece’s troubles are externally imposed allows many Greeks to depict themselves as blameless.

The left-wing protest narrative, says Mr. Featherstone, depicts a corrupt political elite in collusion with a handful of oligarchs and superrich. When Greek and French banks needed repaying, it was ordinary people who suffered. The right-wing story is that the Greek elites have failed to stand up to foreign domination.

But the stories don’t acknowledge that many Greeks were beneficiaries of the system that prevailed before the financial crisis. Friends, families and connections all benefit from a state that everyone knew was characterized by clientelism and nepotism. “We didn’t need a crisis to tell us that Greece has a problem with corruption,” Mr. Featherstone says.

‘Modern Greek history is a history of being bailed out.’
—Stathis Kalyvas, a professor of political science at Yale University
The popular narratives on both sides are therefore at best only partly true or ignore countervailing factors. They may impede solutions because, when fervently believed, they absolve each side from taking responsibility.

And there are costs for the longer term. For all the turmoil in their country’s modern history, Greeks have viewed Europe and, more recently, the EU as representing progress, modernity and better government, Mr. Featherstone says. That idealistic vision has been replaced with a utilitarian one. Greeks don’t love Europe now, they fear what would happen if they left the euro.

Write to Stephen Fidler at stephen.fidler@wsj.com

Why the Yes campaign failed in Greece - Financial Times

July 6, 2015 at 12:40pm

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July 5, 2015 11:25 pm
Why the Yes campaign failed in Greece
Wolfgang MunchauWolfgang Münchau

Tsipras’s opponents made serial misjudgments, from the petty to the monumental

It is not that hard to explain why Alexis Tsipras won the referendum by a landslide. It is a lot harder to see what’s going to happen now.
His opponents, both inside Greece and in the European Union went wrong because of serial misjudgments, ranging from the petty to the monumental. For me, three stand out.

The biggest was the clearly concerted intervention by several senior EU politicians, who said that a No vote would lead to Grexit, a Greek exit from the eurozone. One of them was Sigmar Gabriel, the German economics minister and SPD chief. He even doubled up on this threat right after the results came out. The Greeks correctly interpreted these threats as an attempt to interfere in the democratic process of their country. The news last week that eurozone officials tried to suppress the latest debt sustainability analysis of the International Monetary Fund did not help either. The IMF report essentially revealed that the Greek government had been right after all to demand debt relief. The rest of the EU gave the impression that it wanted to rig the referendum, and it did not even bother to conceal this.
If you have been unemployed for five years, with no prospect of a job, it makes no difference whether the money you do not get is denominated in euros, or in drachma
The second error of the Yes campaign was a failure to explain how the bailout programme could work economically. This is not a debate between Keynesian and neoclassical economics, the kind that keeps us endlessly busy on these pages. The Greek referendum united economists with very diverse views of how the world works, including Paul Krugman, Jeffrey Sachs and Hans-Werner Sinn. There is no reputable economic theory according to which an economy that has experienced an eight-year-long depression requires a new round of austerity to bring about economic adjustment.
The third monumental error was arrogance. The Yes supporters thought they had it nailed. Like the British Labour party before the last general election, they had been relying on polls, which turned out to wildly inaccurate. What I found most galling was the argument that Grexit would bring about an economic catastrophe, as though the catastrophe had not already happened. If you have been unemployed for five years, with no prospect of a job, it makes no difference whether the money you do not get is denominated in euros, or in drachma.
Contempt for democracy and economic illiteracy are not merely tactical errors. Those two “qualities” are now the remaining ideological planks of what is left of the European project. Greece is a reminder that the European monetary union, as it is constructed, is fundamentally unsustainable. This means it will need to be fixed, or it will end at some point.
So what are the options now? I will write about this in greater detail in my next column. But the bottom line is that it is going to be more difficult to achieve a deal now. After the No vote on Sunday, the Greek government will now insist on a very different deal with less austerity. It will insist, and be right to do so, on debt relief that is consistent with the IMF’s latest calculations. I find it hard to see a majority in Germany in favour of such a deal. In fact, I believe the only way to coerce Germany into debt relief talks is to start defaulting. This is not going to happen any other way. At that point, however, the possibility of a Grexit is large.
Perhaps the most realistic solution now would be an agreement that only covers the refinancing of the Greek banking system. The Greek government defaults on its creditors, while the creditors stop paying Greece any new money. That would minimise everyone’s commitment, but such an arrangement, too, is fraught with difficulty.
And finally, it is best not to think of Grexit as a choice the Greek government may, or may not, make. It is not a choice anyone will take. Grexit is what happens when all the other possibilities have been exhausted. There are not many left now.
munchau@eurointelligence.com

Greece needs €60bn in new aid, says IMF - Financial Times

July 3, 2015 at 2:01pm

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July 2, 2015 5:04 pm
Greece needs €60bn in new aid, says IMF

Greece needs more than €60bn in new financial help over the next three years and faces decades under a daunting mountain of debt that will make it vulnerable to future crises, the International Monetary Fund has warned.
In a new analysis that lays out Greece’s economic dilemma in stark terms, the IMF on Thursday called for Europe to grant the country “comprehensive” debt relief, arguing for the doubling of the maturities on its debts from 20 to 40 years.

The fund’s assessment is likely to provide succour to the Syriza-led government which is campaigning for a No vote in a referendum on Sunday. But the IMF also blamed it for the country’s deteriorating situation.
Before Syriza took power in January, the Greek economy had returned to growth and Athens had begun to put its debts back on a sustainable path, the IMF said. But the anti-austerity government’s decision to halt reform and privatisations and renegotiate the terms of its European-led bailout had led to a significant deterioration. The calling of a referendum followed by the shutting of banks and introduction of capital controls had only made the situation worse, it added.
The IMF released its analysis two days after Greece became the first advanced economy ever to default on the fund when it missed a €1.5bn repayment.
Yanis Varoufakis, Greek finance minister, insisted bailout negotiations would resume immediately after the referendum even if a No vote wins. But Jeroen Dijsselbloem, chairman of the eurogroup of finance ministers, warned Greeks their future in the euro was at stake.
“One illusion must be swept from the table: that if the outcome is negative then everything can be renegotiated and you will end up with an easier and more attractive package,” he said.
The eurozone’s top central bankers are set to reconvene on Monday and will almost certainly toughen the terms of emergency loans to Greece’s largest lenders if Greeks vote no in Sunday’s referendum, officials said. That could push one or more of the country’s biggest lenders over the edge and hasten Greece’s exit from the currency union.
The European Central Bank did not impose tougher discounts on the collateral Greek banks used to access loans on Wednesday to avoid claims that it was interfering in Greece’s referendum.
A senior IMF official also denied the fund was trying to influence the outcome of the vote by publishing its debt sustainability analysis.
The review — dated June 26, the same day Prime Minister Alexis Tsipras called for a referendum — said that even before this week’s events Greece needed €29.3bn in new financing for the 12 months beginning in October.
Chris Giles

Tsipras has earned his punishment
Efforts by Greek Prime Minister Alexis Tsipras to restart talks have been rejected by German Chancellor Angela Merkel
The Greek people are enduring the consequences of their prime minister’s childish misbehaviour
Continue reading
Over three years from October, Greece’s total financing needs amounted to €51.9bn, of which €36bn would have to come from its European creditors.
With the expiry of the eurozone’s bailout, Greece would need a further €10bn for the next four months, a senior IMF official said on Thursday. Moreover, there was a very real possibility that they would rise further as a result of the deteriorating economic situation.
“Clearly this is subject to very significant downside risks now,” a senior IMF official said. “It is urgent that we get out of this current situation.”
The IMF analysis put the onus on Greece’s eurozone creditors to grant it significant debt relief. Even with a new bailout Greece’s “debt would remain very high for decades and highly vulnerable to shocks”, the IMF said.
Among the potential concessions proposed by the IMF was a doubling of the maturities on Greece’s existing debts to 40 years and the inclusion of a 20-year grace period on repayments.
“We are saying that the key issue here is that Greece has a very high debt. It needs time to bring it down,” said a senior IMF official.
Chart: Greek government debt projections
“A significant haircut could possibly do it. But so could a significant extension of maturities that would mean that Greece would not have to go back to the markets for a very, very long time,” the official said.
Germany and other European creditors have opposed granting Greece any further debt relief until Athens has committed to and started to deliver economic and fiscal reforms.
Most creditors are strongly resistant to any “haircut” or write-off of Greece’s debt which would, in many cases, require the approval of national parliaments.
But a senior IMF official insisted that its recommendation for an extension of the maturities on Greece’s debts held by European creditors was not intended as a politically palatable compromise.
“This is a dramatic move. This is not . . . something that is easy that is being done to circumvent political constraints, whatever they may be,” the official said. “We are asking the Greeks to do very, very difficult things. We are asking the Europeans to do things that are very, very difficult for them also. Let’s be very clear about that.”

This Is the Method in the Greece Madness - TIME

July 3, 2015 at 2:07pm

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This Is the Method in the Greece Madness
Nicole Gelinas / City Journal @CityJournal July 2, 2015   

The country's leaders had a good reason to act a bit crazy

The world’s financial elite think that Greek prime minister Alexis Tsipras is insane for holding a referendum on the country’s economic future. But there is method in his madness. Greece’s crisis has gone on for too long and caused too many innocent people too much pain. It’s time to end it. If Europe’s lenders can’t come to terms with the simple fact that Greece has borrowed too much and can’t pay it back, then Greece has to come to terms with it for them.

The conventional wisdom holds that the 40-year-old Tsipras is irresponsible, impulsive, and volatile. He sure looked that way last week when he walked away from Europe’s latest offer, which was for Greece to slash spending and raise taxes in return for the cash to make a $1.7 billion debt payment to the International Monetary Fund (IMF) on June 30. Tsipras responded by closing the country’s banks, defaulting on that debt payment, and abruptly calling an election: Greek voters will decide Sunday whether to accept Europe’s terms. University of Athens economist Aristides Hatzis called the decision to hold a vote “irrational.” The Financial Times complained that Tsipras is “wielding” an “unjustified . . . referendum as a weapon against his Eurozone adversaries,” and counseled Greek voters to “listen closely to the words of Ms. Merkel.” The German chancellor and French president François Hollande have warned Greek voters that a vote against budget cuts and tax hikes is a vote to leave the euro.


But sometimes people have good reason to act a bit crazy. In 2009, Greece was running a budget deficit of more than 15% of annual spending, and investors were getting nervous. They wondered if Greece could make payments on its debt, then totaling about 130% of its national output—compared with about 75% for Britain, 54% for America, 61% for France, and 44% for Germany—and continue to provide public services. Investors cut Greece off, and the IMF, the European Commission, and the European Central Bank stepped in to provide Greece with €110 billion in return for spending cuts, tax hikes, and asset sales. The bailout didn’t work, and Greece’s economy continued to spiral down; Europe doubled its lending in 2012.

Lost in all of the talk about Greece’s possible default is that the country defaulted once before. In 2012, Greece used money from European governments to pay its private-sector creditors about half what it owed them. Was that a bailout of private creditors? The private creditors sure thought so—they happily took the deal. But Greece evidently didn’t default enough, since the rest of Europe felt the cure for Greece’s debts to private creditors was an even greater amount of debt to foreign governments.

Today, Greece owes 174% of its national output, a level of debt that simply can’t be repaid. As the IMF said last year, Greece’s debt, as a percentage of the economy, continues to rise, and “the extraordinary levels projected well into the next decade suggest that sustainability concerns”—that is, Greece’s ability to pay—“will remain an obstacle.” Greece has already tried cutting its budget and using the savings to pay down debt. In 2010, Greece raised its retirement age from 60 to 65 and reduced pension payments to retirees from 70% of their income to 60%. The formula for calculating pension payments was rejiggered to save the state money and “bonus” extra pension checks to retirees were eliminated. Because of these measures, Greece’s current budget is actually in surplus. “To have reached a surplus so swiftly is an extraordinary adjustment by any international comparison,” the IMF said last year. It wasn’t enough. Greece still can’t afford to pay its debt. Europe wants even more pension cuts as a condition of loaning to Greece. Without new loans, Greece won’t be able to pay off its old loans.

Greek citizens are suffering because their government promised them more than it could afford— and they may suffer more. But there’s no good reason why Greece’s creditors shouldn’t suffer more, too, because Greece’s government also promised them more than it could afford. If a sophisticated global creditor couldn’t grasp the debt problem before it was too late, how could a middle-class Greek retiree? Europe says it isn’t fair to ask German and French citizens to subsidize Greek retirements. By the same token, though, it’s not fair for Greece to shoulder a 27% unemployment rate—much higher among younger people—so that German and French investors, public or private, can avoid shouldering the loss they deserve for their own bad investment.

Moreover, the other measures that Europe wants Greece to take don’t seem particularly good for Greece. Europe wants Greece to raise its value-added tax and its corporate-income tax. Raising taxes in an environment of double-digit unemployment is never a good idea.

Greece’s default—and Sunday’s possible ratification of that default—need not push the country out of the euro. Greece can work out an arrangement with its European creditors, though they’ll have to settle for much less than they’re owed and wait longer to get it. Europe can force Greece out of the euro if it wants to by refusing to lend to Greek banks as they struggle to deal with panicked depositors withdrawing all their money. (Greece cannot keep its banks closed forever.) Either way, though, default doesn’t have to mean disaster, or, at least, a worse disaster than the current one.

A decisive Greek default might give the world a needed lesson: Stop lending money to borrowers who can’t pay it back fully—and when you’ve already lent too much money to borrowers who can’t pay it back, don’t expect to be fully repaid. The world should have learned this lesson in 2008, when the global financial crisis reached its nadir. Instead, Western governments continued to lend trillions of dollars at ever-cheaper interest rates to everyone from corrupt Brazilian oil companies to subprime American SUV buyers. Even with all this money sloshing around, Detroit couldn’t repay what it borrowed, Puerto Rico can’t repay what it borrowed, and Chicago probably can’t repay what it’s borrowed. Even healthier cities such as New York can’t make good on their obligations to bondholders and future pensioners.

People often visit Greece to take a vacation from reality. But perhaps it’s time for Greece to show the rest of the world what reality looks like.

Nicole Gelinas is the Searle Freedom Trust Fellow at the Manhattan Institute and a City Journal contributing editor. This article originally appeared on City Journal

The past five days have been worse than all that has gone before - Financial Times

July 2, 2015 at 11:46pm

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July 1, 2015 10:53 pm
The past five days have been worse than all that has gone before

Sir, Memory. No memory of life before the financial crisis; politics has dominated it ever since. But now I can hardly remember life before Friday night. Fear. I am terrified of tomorrow, all I now see is black. Uncertainty, leading us through our days, every remainder of hope for a brighter future being destroyed by the minute. I look at my three-year-old niece, I envy her ignorance, I envy her age. I am 21 years old and the past few days I feel tired by life. A referendum that supposedly gives me the right to define my future, seems to have taken it away.
There are hundreds of people queueing at the ATMs and petrol stations, there is silence in the streets, people’s faces are frozen. This is the reality since Friday night. There are, and have been for a long time, people literally starving. However, it seems that instead of their situation improving, the rest of us will have no different a fate.

Families and friends divide in Yes and No camps. We are called to exercise our democratic right by voting on a referendum while having no tangible explanation of what will follow each decision. I see everyone I know ready to take this huge responsibility without even being prepared to do so. I notice us, arguing endlessly, everyone supporting their stance fervently, ego dominating minds and words, while having no clue as to what is really at stake.
We all want the crisis to end, we all crave growth and happiness. I do not remember my parents being free of stress and anxiety in the past years. I do not remember not noticing shops closing every month, or the rapid increase of beggars in the streets. People that, before the financial crisis, never had to beg for anything. However, the past five days have been worse than all that has been so far. They say that all we hear is propaganda; but we have lost our trust in all sides, now everything seems to be lies.
It feels like an end. The end of our lives as we knew them. Yes, the lives that, before Friday, we already thought could be better; now we realise they were better then. The only thing we truly wish for is that the worst is not yet to come.

It Looks a Perfect Exit Stage Left for Alexis Tsipras - Wall Street Journal

July 2, 2015 at 6:05pm

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It Looks a Perfect Exit Stage Left for Alexis Tsipras
If Grexit was the prime minister’s goal, it is hard to think of anything he would have done differently

July 1, 2015 4:46 p.m. ET

How much of Alexis Tsipras’s tactics in the past five months have been driven by incompetence and how much by conspiracy? It’s a question even the historians may never fully resolve. The Greek Prime Minister said in a televised statement that those accusing him of having a deliberate plan to take Greece out of the eurozone were telling lies. But what is certain is that if Mr. Tsipras had set out in January to take Greece out of the eurozone, it is very hard to think of anything he would have done differently.

He won the election on a pledge to respect the overwhelming desire of voters to remain in the eurozone, which meant he had no choice but to go through the motions of negotiating with Greece’s creditors for as along as they were willing to indulge him. If Grexit was always his goal, then his only challenge was to ensure the talks dragged on until the bailout expired, capital controls were introduced and the country defaulted, making a euro exit hard to avoid. The only risk to such a strategy was a bank run before the bailout expired, in which case politics may have intervened.

If this was Mr. Tsipras’s plan, he has played it perfectly. Depositors were persuaded to keep their money in the banks by daily assurance for five months that a deal was imminent. In fact, for most of that time, no negotiations of any substance took place at all. Mr. Tsipras strung out the process with endless discussions over what the creditors should be called, where the talks should be held and who should talk to whom.

At the last minute, he tabled proposals that never stood any chance of being accepted, but which have allowed him to claim it was the creditors who were being unreasonable. Now with the bailout expired, the banks closed and the country in default, he has called a referendum asking voters to reject a deal that is no longer on the table.

Mr. Tsipras continues to insist that a “No” vote won’t lead to Grexit but will strengthen his hand with the creditors. No policy maker anywhere else in the eurozone thinks this is true. The relationship between Mr. Tsipras and other eurozone leaders has broken down so irretrievably that it is hard to see how they can possibly agree on new loans for Greece while he remains in power. Instead, a “No” vote would force the European Central Bank swiftly to conclude that the Greek banking system, which relies heavily on government guarantees, was insolvent, perhaps as soon as Monday. The banks would be forced to close and couldn’t be reopened until they had been recapitalized, either via a bailing in of depositors, or using a newly-printed currency.

Of course, Mr. Tsipras may have reached this point by accident. While there are certainly some hard-liners in his party who have always advocated “rupture” with the country’s creditors, the inscrutable Mr. Tsipras may simply have been one of those who accepted the assurances of Yanis Varoufakis, the self-confident finance minister and expert in game theory, who has always argued that the creditors would ultimately capitulate in the face of Greek intransigence.

Even now, most eurozone policy makers are willing to believe that Mr. Tsipras has blundered into his current position as a result of inexperience and incompetence rather than as a result of a secret mission to take Greece out of the euro. Perhaps Mr. Tsipras did miscalculate. If he sincerely thought that the eurozone would extend the bailout deal for an extra week to allow Syriza to campaign against it, then he really was naive. And if he didn’t realize that by turning his back on the only source of funding available to Athens, that the ECB was bound to take steps to protect its own balance sheet by—at the very least—capping the exposure of Greek banks to further emergency loans, then he was certainly inexperienced and incompetent.

It seems clear that Athens failed to anticipate how quickly panic would spread once capital controls were introduced and pensioners without bank cards found themselves cut off from their savings.

Yet even now, Mr. Tsipras’s tactics continue to baffle his creditors. At a meeting of Eurogroup finance ministers on Tuesday, Mr. Varoufakis formally requested the eurozone start talks on a third bailout program—yet somehow failed to provide a promised letter detailing what reform commitments Greece was ready to make in return. When the letter duly arrived on Wednesday, it turned out to fall far short of the expected capitulation.

Creditor officials said it created substantial new fiscal gaps compared to what the creditors had been demanding and took no account of further damage to the economy since the introduction of capital controls. Besides, many Eurogroup ministers made clear to Mr. Varoufakis that there could be no discussion of a new bailout program until Athens either canceled the referendum or agreed to campaign for a “Yes” vote. Instead, Mr. Tsipras took to the airwaves on Wednesday to reiterate his call for a “No” vote.

Mr. Tsipras’s decision to escalate rather than capitulate raises the stakes but not all of Greece’s creditors will be disappointed. Opposition leaders believe that with each day that capital controls remain in place, the polls are swinging further in their direction and that they are on for a large win.

That would bring a degree of political clarity to the situation: Mr. Tsipras would be forced to resign while eurozone officials say that in the event of a strong “yes” vote, they would have an obligation to find a deal with any new Greek government to keep Greece in the eurozone.

But the situation may not be so simple. In deciding to continue to fight for a “No,” Mr. Tsipras and his party can absolve themselves of any responsibility to implement a deal. Since Syriza and other antibailout parties dominate the current parliament, new elections would then be needed which would take up vital time and which could return him to power. Indeed, if Mr. Tsipras really did have his heart set on Grexit, then campaigning for a “No” vote in the referendum could enable him to “win” whatever the outcome.

Write to Simon Nixon at simon.nixon@wsj.com

Explainer: If Greece leaves the euro - Financial Times

June 30, 2015 at 1:31pm

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EU/IMF inspectors in Greece as eurozone exit fears grow...epa03316123 An illustration showing a Greek flag projected onto a Greek one euro coin in Schwerin, Schwerin,†Germany, 24 July 2012. International creditors will on 24 review Greece's troubled austerity programme at a time of renewed concern about the country's future in the eurozone. The new conservative-led coalition government is scrambling to come up with 2.5 billion euros (3 billion dollars) more in savings to meet the target of 11.5 billion euros set by the European Union and the International Monetary Fund (IMF) for 2013 and 2014. Among the measures recommended by the Center of Planning and Economic Research (KEPE) pension cuts worth an estimated total of 5.1 billion euros. EPA/JENS BUETTNER©EPA
What happens once a country leaves the euro?
On financial markets a new currency first needs a new currency code that can be identified by computers for trading and payments. They are issued by the Swiss-based International Standards Organisation, a worldwide federation of national standards. It provides an alphabetic three-character code, with the first two letters representing the country and the third the name of the currency. In Greece’s case it could not go back to its old code for drachma, GRD, because there are still some outstanding payments to be made. It would require a new code, most likely GRN.

After that, the code must be entered into software and payments systems so the computers can recognise it for payments processing and trade confirmations and other critical but unseen functions. Market infrastructure providers say this can be done in one business day if needed.
Is that really all it takes for markets?
In reality it requires far more. Switching over to a new currency is trickier when it comes to resolving long-dated forward financial contracts, such as swaps and options.
There is a host of legal questions that have to be resolved as payments are switched from one currency to another. Some trades may have to be modified or even rebooked. It is far from an impossible job, but as it involves legal changes, it is a slow and careful process.
Thankfully there is no wall of long-term Greek derivatives trades. The five-year saga has made investors wary and few have accepted Greek central bank-backed collateral for their trades, even if the European Central Bank has permitted it to be used as collateral in Eurosystem monetary policy operations. Some market participants have suggested it could be done in 30 business days but that might prove to be optimistic too.
What would the market expect the Greek government to do to support its new currency?
The Greek government would be likely to set a new Greek currency at half the value of the euro to gain some degree of competitiveness, and enforce that through a mixture of capital controls and currency intervention, and create liquidity through bond issuances.
But how to redenominate euro notes is the hard part. Greece would suffer from disruption to the banking system, bankruptcies, people trying to take their money out of the country illegally and uncertainty about commercial transactions.
It took the euro three years to get from launch date to notes issuance, and although it is unlikely that it would this long for Greece to set up a new currency the process could still take months.
What impact would Greek exit have immediately on the markets?
Market turmoil following an announcement of capital controls or an exit from the euro would not worry a forex settlement service such as CLS.
It is unlikely that there would be a lot of trading business at first though. It is an open question as to how much of the new currency people would have to trade.
Beyond that, Greece would also have to develop a system to settle payments in central bank money, but that could take several years.
Could be a good outcome for Greece?
“Introducing a new Greek currency is do-able over time,” says David Puth, CLS chief executive, “but it is not cost-free.”
“The introduction of a new currency is complex when done in a planned way. When done suddenly and under duress, the process will be disruptive with many unintended consequences that cannot all be anticipated.”
OK, so that’s the Greek side of the saga. What about the euro, is that unaffected?
Not exactly. That is because a Greek exit blows apart the principle sacrosanct to the EU — that eurozone membership is a club you can join but cannot leave. That affects investors, corporations and others with uneven exposure to a break-up of the eurozone.
Such as who?
Such as an Italian manufacturer, say, whose assets and revenues are in Italy but whose financing is done in euros.
So what could it do to protect itself?
James Wood-Collins, chief executive of Record Currency Management, which advises clients on hedging forex exposures, suggests establishing re-denomination swaps or legal tender contracts. They would put a price on the likelihood and impact of a country leaving the eurozone and re-establishing its domestic currency.

“Banks and other market participants have discussed such instruments in recent years, but a market has not yet been established,” he says. “The potential exit of Greece could provide the necessary catalyst for this development.”

Greece must be saved from political, economic and social collapse - Financial Times

June 30, 2015 at 12:07am

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June 27, 2015 8:30 pm
Greece must be saved from political, economic and social collapse
Tony Barber


This may be the first step backwards in the harmonious integration of Europe, writes Tony Barber
 The leaders of Germany and France offered to release billions in frozen aid on Friday in a last-minute push to talk Greek Prime Minister Alexis Tsipras into contentious pension reforms in exchange for filling Athens' empty coffers until November. REUTERS/Yannis Behrakis©Reuters

In spite of the recklessness of its radical leftist-led government, in spite of the failures of the political classes that have misruled the nation since the return of democracy in 1974, in spite of the chronic clientelism and corruption of the state, in spite of the selfishness of its business oligarchies and in spite of the unerring capacity of its foreign creditors to miss the big picture, Greece must today be saved from political, economic and social collapse.
Without such an effort, which must be led by the EU, Greece will be sucked ever more deeply into the political radicalism, economic misery, organised crime, uncontrolled migration and even outright war that characterises an arc of countries from Bosnia-Herzegovina in the Balkans to Syria on the east Mediterranean coast.

It is irrelevant today to assign blame for what is shaping up as a Greek debt default and exit from the eurozone. The clock will not stop just because Greece’s eurozone partners — if “partners” is even the right word any more — have stated their patience is at an end. Greece is in south-eastern Europe, and the stability of south-eastern Europe is a matter of the highest importance to the EU and the Nato alliance.
If Plan A was to find a way of kicking the can down the road and keeping Greece in a support programme that maintained its eurozone membership, and if Plan B (now being implemented) is to protect the rest of the eurozone from Grexit, then there needs to be a Plan C. Plan C will require immediate action to prevent the implosion of the Greek economy and contain the poisonous political repercussions of the failed aid-for-reform negotiations. It will mean demonstrating to ordinary, desperately hard-pressed Greek citizens that its allies will not let down their country.
Even if these efforts achieve some success, however, let there be no doubt about the broader historical significance of what is unfolding in the Greek tragedy. It marks the first step backwards in what used to be celebrated as a steady, if sometimes wobbly, process towards the harmonious integration of Europe, a continent torn to shreds in the second world war and then divided, until 1989, into a democratic west and Soviet-controlled communist east.
The goal of harmonious European integration is now under greater threat than ever, thanks to the challenges of irregular migration, economic stagnation, Russian truculence, narrow-minded British attitudes and the appalling mishandling of the eurozone’s troubles.
But, for now, the overriding priority must be to help Greece — in or out of the eurozone.
tony.barber@ft.com

Greece’s Debt Crisis Sends Stocks Falling Around Globe - New York times

http://www.nytimes.com/2015/06/30/business/international/daily-stock-market-activity.html?hp&action=click&pgtype=Homepage&module=a-lede-package-region&region=top-news&WT.nav=top-news&_r=0

Greece’s Debt Crisis Sends Stocks Falling Around Globe
By DAVID JOLLY and KEITH BRADSHERJUNE 29, 2015


The Nikkei 225 ended 2.9 percent lower on Monday, its weakest close since June 19. Credit Thomas Peter/Reuters
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PARIS — Stocks fell sharply in Europe and Asia on Monday, and markets in New York appeared headed for a slump at the opening, as Greece’s financial difficulties spread worries about possible broader harm to the global financial system, and Chinese investors endured another topsy-turvy session.

The Euro Stoxx 50 index of eurozone blue chips were down 3.9 percent in afternoon trading, having fallen about 5 percent at the opening. The FTSE 100 index in London was down 1.8 percent.

In Greece, banks and markets are closed until July 6, after Prime Minister Alexis Tsipras interrupted last-ditch debt negotiations early Saturday with the announcement that he was calling a referendum for July 5 on whether to accept the tough terms offered by international creditors.



Greeks lined up to withdraw cash from an Alpha Bank A.T.M. in central Athens on Sunday. Daily limits on cash withdrawals loomed as part of the government's emergency measures in the face of its fiscal crisis.Greece Will Shut Banks in Fallout From Debt CrisisJUNE 28, 2015
An anti-austerity protester burned a euro note at a demonstration in Athens on Sunday.Currency Crisis: The Next Few Days Have the Potential to Transform Greece and EuropeJUNE 28, 2015
Graffiti on a street in central Athens on Sunday. The European Central Bank said it would not expand an emergency loan program that has been propping up Greek banks in recent weeks while the government was trying to reach a new debt deal with international creditors.Cash Withdrawals and Hoarding as Default Looms Over GreeceJUNE 28, 2015
Investors have been concerned by the probability that Athens will be unable to meet a 1.6 billion euro, or roughly $1.8 billion, loan repayment to the International Monetary Fund that is due on Tuesday, with uncertain consequences for Greece’s future in the eurozone and even in the European Union.

While investors were clearly concerned about the events of the weekend, there was no sign on Monday of widespread panic. Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note that the current situation was “a tragedy for Greece,” but that it was “not a ‘black swan’ moment.”

The European Central Bank and other eurozone authorities have had four years to prepare for this moment, Mr. Schmieding wrote, and “we expect contagion control to work, by and large.”

The euro also dropped, falling 0.5 percent against the dollar, to $1.1111, as investors feared that Greece’s troubles would have a spillover effect and would make European assets less attractive.



Bonds of the most exposed European governments, including Italy and Spain, fell sharply, while their yields — or interest rates, which move in the opposite direction of prices — rose. The prices of bonds sold by countries considered safe investments, like Britain, Germany and the United States, all rose.

Greek two-year bond prices were down sharply, with yields rising to more than 32 percent. Comparable German bonds were trading to yield less than 1 percent.

With the Athens exchange closed, Greek equities in the form of American depositary receipts fell sharply in premarket trading in the United States. Those equities for the National Bank of Greece, the country’s biggest lender in terms of assets, fell more than 30 percent early Monday.


The country became the epicenter of Europe’s debt crisis after Wall Street imploded in 2008. Now, it is struggling to pay its debt, and its people and creditors are growing restive.



Greece has been struggling to find a solution to its debt troubles for years. But the speed with which its government called a referendum on the bailout terms and shut its banks appears to have caught at least some investors off guard.

“Most people’s consensus forecast was for them to muddle through with some kind of a deal,” said Kymberly Martin, the senior market strategist at the Bank of New Zealand, “so it has taken people a little bit by surprise.”

Standard & Poor’s 500 index futures were down more than 1 percent in the European morning, suggesting that Wall Street would open lower.


Greece Shuts Banks to Stem Tide of Withdrawals

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Pensioners line up outside a closed bank in Athens on Monday. The European Central Bank said it would not expand an emergency loan program that had been propping up…Greek banks for weeks. Credit Yannis Behrakis/Reuters
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In Asia, an interest-rate cut by Beijing on Saturday failed to stem the fall in Chinese stock markets beyond the first hour of trading. The Shanghai composite index closed the day 3.3 percent lower, having been down as much as 7.6 percent and after plunging more than 7 percent on Friday. In Hong Kong, the Hang Seng fell 2.7 percent.



The Tokyo benchmark Nikkei 225 stock average fell 2.9 percent, and the Australian market barometer S&P/ASX 200 fell 2.2 percent in Sydney.

The price of gold, which tends to become more popular during times of financial or political instability, climbed 0.6 percent, to $1,180.30 per ounce.




The People’s Bank of China, the country’s central bank, reduced one-year lending and deposit rates by a quarter percentage point, effective on Sunday, and reduced the reserves that some banks are required to hold, allowing them to lend more money.

The central bank had previously refrained from acting so quickly after a market downturn, so its action over the weekend was interpreted as a clear sign that the government was reluctant to see the Chinese stock markets lose their gains after doubling in the past 12 months.


“It marks a slight departure from the previous P.B.O.C. moves, because this time it looks to be directly timed as support for the equity markets,” said Erwin Sanft, the head of China strategy in Hong Kong at Macquarie Capital Securities, referring to the Chinese central bank.

Rajiv Biswas, chief economist for Asia at IHS Global Insight, said that if Greece defaulted and left the eurozone, the effects on Europe’s economy and on exporters in Asia would depend on whether European leaders could prevent financial troubles from spreading to Portugal, Spain and possibly Italy. If the damage is not contained, economic output in Asia could drop 0.3 percent next year on lower exports to Europe, Mr. Biswas said.

Ms. Martin of the Bank of New Zealand said such calculations were not at the front of investors’ minds. “I think people are still more concerned about the immediate impact, not the longer-term effects on eurozone growth,” she said.

David Jolly reported from Paris, and Keith Bradsher from Hong Kong.