Listen to this article
These are the questions that the FT’s social media audience have been asking about the Greek debt crisis. Martin Sandbu, our economics writer, answers:
How can a country with a population of less than 12m people hold the entire EU to ransom?
That’s an excellent question. In part it’s because the eurozone early on chose to think that a Greek default (to private creditors as it was then) would be a disaster for everyone else. In part because market investors thought so too — and so troubles in Greece translated into trouble for other crisis-hit countries with high debt or big deficits.
Does Greece have any alternative to getting finance from the eurozone — in particular from Russia or China?
I would say those alternatives are poor to non-existent. In the immediate future, it’s hard to see how it would even be possible to put together a loan in time for Athens to avoid defaulting on the IMF (payment due on Tuesday) or a private bond held by the ECB (due July 20). In the long run, it’s unlikely that other countries would be willing to lend the sort of money we’re talking about without equally tough conditions, or at all — remember Russia is under sanctions and has precarious savings.
So the real choice is between an agreement by which the eurozone/IMF loans are renewed or extended, or a unilateral decision not to pay them.
Can Greece default and stay in the EU?
The quick answer is that it very probably can, and everyone will want it to. The only suggestion that it may not is that there is no legal procedure for leaving the euro (there is one for leaving the EU, however) and all EU members except those with an explicit opt-out (the UK and Denmark) are legally obliged to join the euro eventually. Most likely Greece would be put in the legal status of a pre-euro member state and be under the obligation to try to satisfy the (re-) entry criteria. Here is a good article on the legal conundrum.
Can Greece accept a bailout package and leave the euro?
I don’t see how this would make sense. So far Greece (and other countries) have accepted the conditions on so-called rescue loans in order to stay in the euro. And the loans have been offered as a way to make them stay. If Greece left, it would have to default in any case, so it may as well default within the euro.
Could Greece introduce a parallel currency?
Yes it could, and this could help it in the short term but wouldn’t do much for it in the long term. There is a serious discussion of the options for parallel currencies here
Can Greece really solve its economic woes without a debt restructuring process?
No. But debt restructuring can mean many things. It could mean to keep the nominal debt as it is, but extend all repayments far into the future. That would do a lot of good and could be enough.
What happens if Greece goes bankrupt? Would it be forced to sell off state assets?
It is very hard to force a sovereign to do anything. The usual outcome of a sovereign restructuring is a lengthy negotiations which ends up with partial repayment.
If Greece moves to the drachma, what happens to all the euros in the country?
That’s a very good question. If you mean the euro cash in people’s hands, the answer is nothing — they can keep spending them wherever the euro is still legal tender. But most of the “euros in the country” only exist in the form of bank deposits. If Greece did restore a national currency, it would have to redenominate a lot of domestic assets and liabilities and that would probably include deposits.
How will the Greek crisis impact the EU banking system?
That’s a big unknown. The system is in better shape than it was a few years ago, and the ECB is more willing to act aggressively if it needs to. But if markets start to think that other countries could get into similar trouble, that would hurt the banks who own a lot of peripheral-country debt — the infamous “bank-sovereign nexus”. My best bet is that the damage will be easier to contain — especially because the EU is now better at restructuring lossmaking banks.
Should the country leave the euro, what would happen to consumer mortgages taken out in euros?
A government that restored a national currency would also most probably redenominate most of the debt contracts under Greek law to the new currency as well. That would include mortgages — since these would in many cases become unpayable in their original value after a collapse in the euro value of incomes.
What will a Greek default mean for creditors?
Not as simple as it may seem, because it depends on the creditor. For the IMF and the ECB, who have repayments coming up on Tuesday and in July, it would mean not receiving the money they expect. But defaults are messy, drawn-out processes, and they never mean that “nothing” is paid. Defaulting sovereigns usually negotiate partial repayment, and Greece has an interest in keeping private investors happy. My colleague Elaine Moore recently wrote a handy guide to the experience with default elsewhere :
How much, if any of the debt, is sustainable?
This is a bit of a trick question really, which goes to show how badly designed the creditors’ demands have often been. The IMF defines sustainability as getting below 120 per cent of GDP within a foreseeable timeframe. But as my colleague Ferdinando explains here, debt-to-GDP is a very poor indicator of sustainability. It doesn’t take account of the interest rate to be paid, or when the debt has to be paid back. So some people think Greece’s debt is sustainable now, and it’s purely a liquidity problem.
Considering that the majority of Greek exports probably don’t actually leave the eurozone, will Greece profit economically from the potential currency devaluation coming along with a euro-exit?
I think the choice not to write down Greek debt before the rescue loan (in May 2010) was a huge mistake. 90 per cent of the money went not to cover domestic spending but service outstanding debts or bail out banks (see the details here). Even the restructuring in 2012 was mismanaged — the ECB’s bonds were left untouched, which is why €3.5bn fall due in three weeks time. Karl Whelan has also written very well on Europe’s “gunboat diplomacy” after the original mistake here.
Why are European leaders so opposed to a Greek referendum? Are they against democracy?
It’s not the first time, of course; much of this is a repeat of Papandreou’s referendum stunt in November 2011. I think they are afraid of when the people make what they think is a bad choice. I also think they are afraid of admitting that they made big mistakes.
How should the Greeks vote in the referendum?
As things stand now, I would vote no, on the basis that it is possible to stay in the euro (uncomfortably) after a default. It’s painful but possible, and better than leaving the euro. I have written about how here and here. But I’m hopeful that a better deal can be struck and would vote yes for something that recognises the flaws in the previous policies.
Is a national currency without serious foreign reserves inconceivable?
It is conceivable. Most currencies are after all “fiat currencies” which means they are not formally backed by anything. But without foreign reserves, a country could not defend any particular level of the exchange rate. As a result it would be very volatile — and to begin with, fall very low. This is one reason why Iceland put foreign exchange controls in place in 2008 — they feared capital outflows would overwhelm reserves.
What are the security implications of a Grexit?
The security implications are enormous. If there is Grexit, things could get much worse in Greece both economically and politically. It’s clear that Europe does not see it in its interest to have a destabilised country on its southeastern flank which feels bitter about how it’s been treated by the rest of the club. So expect a lot of involvement — including financial help — after a potential Grexit. Better for everyone if it doesn’t happen.