Greece's cash-flow crisis

Following Greece’s cash-flow crisis is a confusing business.

To give one example; on one day last week newspaper headlines shouted that the European Central Bank had agreed to increase its emergency lending to Greek banks. The next morning, they were filled with reports that the ECB had tightened its rules on lending to Greece, leaving the country just a couple of short weeks away from running out of money.

The fact that both stories were true illustrates what an unholy, complicated mess the Greek debt crisis is.

Cashflow crisis

Nobody seems to know for sure how broke the country is. In an interview at the weekend, eurozone commissioner Valdis Dombrovskis i would go no further than to concede that "the liquidity situation is very tight".

The general view amongst commentators and analysts is that an agreement with its creditors is needed by mid-April to prevent a default. The Fitch ratings agency downgraded Greece by two notches, warning that although it should be able to avoid defaulting on its debt, the ongoing crisis “has almost certainly derailed Greece’s incipient economic recovery”.

However, one thing is for certain: the Greek government and its banks are desperately short of cash. Cut off from tapping the remaining €7.2 billion in its EU/IMF bailout fund, a vital source of revenue is unavailable to Greece.

At the same time, around €1.5 billion is flowing out of Greek bank accounts every day, while more than €25 billion has left Greek bank accounts in the last three months. The total sum of deposits in Greek banks has tumbled to its lowest level since June 2005. Total deposits in February were around €140 billion, compared to €220 billion when Greece’s first bailout package was agreed in 2010.

Consequently, regardless of whether Greece and/or Greek banks default, there is a distinct chance that it will be forced to follow Cyprus and become the eurozone’s second country to impose capital controls.

Cyprus was forced to introduce capital controls in March 2013 in a bid to limit a run on its banks as a €10 billion bailout programme was messily agreed with the EU. Initially, the government set restrictions on bank money transfers and withdrawals, including a daily cash withdrawal limit of €300. Many of the restrictions are still in place.

It is all a far cry from the relatively rosy outlook in autumn 2014. After six consecutive years of recession, the Greek economy grew while unemployment declined. The hope, and expectation, was that Athens would be able to begin to self-finance on the financial markets before the end of 2015.

Since Syriza’s election in January, the country’s growth forecast has already been halved from 2.9 percent to 1.5 percent. With its bailout plan based on the assumption that Greece will record its second consecutive primary budget surplus in 2015, the treasury in Athens cannot scarcely afford any more slippage.

Looming payment deadlines

Prime minister Alexis Tsipras i halted his country’s bailout programme at the precise moment when Greece was going to be most in need of money. The Greek government faces repayments of over €3 billion in April, including a €450 billion bill to the International Monetary Fund, and a total of around €16 billion over the next four months in treasury bills and to the ECB and IMF. The Economist magazine reckons that Greece’s repayments amount to roughly 30 percent of its economic output over the next six months.

In the absence of the bailout money, the ECB has found itself in an extremely awkward position as Greece’s main source of cash on a daily basis. As its President Mario Draghi i told MEPs last week, the ECB has more than doubled its exposure to Greek debt from €50 billion to €104 billion since December, equivalent to almost two thirds of the country’s annual economic output. A Greek default would be extremely painful for the Frankfurt-based bank.

Yet the ECB has been accused of effectively blackmailing Greece after the Frankfurt-based bank removed the waiver that allowed Greek banks to access its cheap loans using government bonds and government-guaranteed assets as collateral.

Market power trumps democracy

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody,” Bill Clinton’s chief of staff James Carville is reputed to have said.

Greece hasn’t been able to finance itself on the bond markets since spring 2010. Instead, aside from its own tax revenues, its money to carry the everyday functions of government has come from the ECB and its creditors. The eurozone’s answer to the bond market is a combination of the Troika and the ECB.

But Carville’s point was that governments are powerless if they can’t raise money, and that is the situation faced by Greece. No government can function without cash.

Alexis Tsipras and Syriza won a clear victory in January’s elections. But the fact that Greece will not be able to pay down the bulk of its 177 percent debt burden for another 50 years (if at all) is irrelevant. Similarly, Tsipras’ manifesto promises to end austerity and renegotiate the country’s bailout terms will have to remain still-born if Greece is to avoid running out of money.

Fortunately for Tsipras, both he and Syriza are continuing to enjoy a post-election honeymoon with Greek voters. The government’s approval ratings stand at around 60 percent (though they have fallen over the past month) and Syriza would be re-elected by a much larger margin if fresh elections were held tomorrow.

Tsipras still has a large dollop of public goodwill at his disposal. He is almost certainly going to need it.