European Leaders Warn ‘Grexit’ Could Be Closer Than Ever Before
Greek Prime Minister Alexis Tsipras was supposed to have new proposals to save his country from economic disaster. He doesn't, and European officials are warning of a Grexit.
Greek Prime Minister Alexis Tsipras was supposed to head to an emergency meeting in Brussels Tuesday with some bold new proposals to save his country from bankruptcy. One small problem: He neglected to bring anything original, prompting European officials to warn Greece could be forced out of the euro.
Now, firms on Wall Street, just like pensioners storming Greek banks to rescue retirement money, are readying for the prospect of a “Grexit” — Athens leaving the eurozone. For years, financiers in Europe have developed so-called “firewalls” to prevent contagion if the Grexit occurs. These firewalls include cheap lending by the European Central Bank and the creation of an emergency contingency fund, known as the European Stability Mechanism, containing hundreds of billions of dollars to help prop up European economies during times of crisis.
But because no country has ever abandoned the euro, no one knows what would happen if one does. And there are some troubling signs.
If Greece is unable to pay back what it owes, American and European banks are going to be out tens of billions of dollars. According to data from the Bank for International Settlements, U.S. financial institutions now hold around $12 billion in Greek bonds. They’d have to fight with Greek officials to get any of this cash back.
Investment banking, a key revenue source for financial giants like Goldman Sachs and Deutsche Bank, would take an enormous hit. On Tuesday, the law firm Baker & McKenzie released a report that found a disorderly Grexit would wipe out $1.4 trillion in future mergers and acquisitions.
World markets are also at risk. German Finance Minister Wolfgang Schäuble has long maintained that a Greek default is priced into the global economy. But recent market reactions show that investors will feel some pain, at least in the short term.
This is especially true across the eurozone. The value of its currency has reached 12-year low against the dollar; one euro is worth $1.10. It could fall more if the Grexit actually occurs.
Last week, when it became clear Athens would miss its payment to the International Monetary Fund, the Dow Jones Industrial Average lost 350 points, the biggest drop of 2015. Since then, the Dow and other stock market indices have traded gains and losses.
As of 2:00 p.m. Tuesday, the Dow is down 57 points, and other world stock market indices are also lower. Some insiders are now raising the possibility that the Grexit could kill the seven-year bull market that fueled the American economic recovery.
Uncertainty is also causing chaos in oil markets. Yesterday, amid concerns about Greece and the Chinese stock market, which has lost nearly 30 percent of its value this year, oil prices dived 8 percent. It marks the biggest sell-off in five months.
The Grexit also opens up the possibility that some other nations with shaky finances could face new scrutiny. Spain, Italy, and Portugal have long struggled with enormous debt loads of their own.
“There is a meaningful risk that other countries would join Greece in leaving the euro. The euro is patently not an optimal currency union at the moment, which gives economic momentum to the idea of a broader fragmentation,” UBS Group AG said in a recent research note.
The Greek crisis is even making its way into the sports world. Shares of Manchester United, the famed British football club, are down 5 percent this past week, something Forbes attributes to the debt standoff.
Wilbur Ross, who manages billions in distressed debt as chairman and chief strategy officer of WL Ross & Co., puts the chances of a Grexit at 40 percent.
“All the polls I’ve seen show a clear majority of the Greek people want to stay in the EU,” Ross said Monday morning on CNBC. “Now, it’s also true that they don’t want austerity and those two are logically inconsistent.”
Europe did extend an olive branch this week. It reopened a line of credit to Greek banks, which are close to running out of cash. They remained closed Tuesday to prevent more capital flight from the Mediterranean nation.
At an emergency Eurogroup meeting, Tsipras repeated a proposal for a 30 billion euro loan — about $33 billion — from Europe’s emergency reserve fund to cover the country’s expenses for two years. This includes the $1.7 billion it owes the IMF, and the 6.7 billion euros, or $7.5 billion, Athens owes the European Central Bank over the next two months. He also demanded that his government be allowed to pay less than the amount it has already borrowed from Europe.
Both requests are similar to those Tsipras made in the frenzied months before Europe’s $270 billion bailout package expired last week.
U.S. President Barack Obama waded back into the crisis Tuesday. He called Tsipras and urged him to resolve the standoff with Europe. But the president’s intervention isn’t likely to improve the sour mood between European leaders and the Greek prime minister.
During the meeting, Malta’s prime minister, Joseph Muscat, tweeted this:
He later told a television reporter that talks are looking like “a waste of time.”
Speaking to reports in Brussels, Belgian Finance Minister Johan Van Overtveldt also said he was pessimistic.
“The Greek economy is in free fall, the banking system is also more or less in free fall, so we really don’t have much time left,” he added.
As the gathering ended, it was clear Europe’s frustration with Greece was nearing a boiling point. On Monday, French President François Hollande said he was open to new talks after Greek voters rejected Europe’s austerity plan, which includes reforms to the Greek retirement system and new taxes. But that goodwill disappeared Tuesday.
After arriving in Brussels Tuesday, German Prime Minister Angela Merkel said there is no basis to restart talks, and that the crisis must be resolved in the coming days, not coming weeks. Martin Schulz, a German who serves as European Parliament president, said Greece needed to use a currency other than the euro after Sunday’s “no” vote, a threat his peers have yet to enforce. European officials overwhelmingly say they don’t want Greece to leave the eurozone, but they are now dusting off plans, three years in the works, for how to deal with it.
Tsipras is set to address the European Parliament Wednesday as the emergency session continues; most expected him to speak Tuesday. Late Thursday, European officials gave him until Sunday to submit a new proposal. They said that’s the final deadline.
But according to Joerg Wolf, editor in chief of Atlantic-community.org, a Berlin-based think tank, frustration with the failure to end the five-year crisis has more and more European officials willing to consider pushing Greece out of the monetary union it joined in 2001.
“What a mess,” Wolf said. Merkel doesn’t want the Grexit to be her legacy, he added.
But Wolf said it might be impossible for Greeks to accept what Germans are demanding.
“What is needed is a vision and a comprehensive plan to reform Greece. Sending money or debt relief will not help to fix Greek problems,” Wolf told Foreign Policy. “In addition to big economic reforms, Greece needs to build efficient government institutions that collect taxes, fight corruption, [and] help ordinary people — not the well-connected folks.”
So far, Tsipras hasn’t shown himself willing to accept European austerity to get the deal with Europe he and his far-left Syriza Party promised when he took power earlier this year. And his new finance minister, Euclid Tsakalotos, hardly inspired confidence at his first public appearance Monday.
“I won’t hide the fact that I’m nervous and anxious,” Tsakalotos said at his swearing-in ceremony Monday. He took the post after his controversial predecessor, Yanis Varoufakis, who called Germans Nazis on a number of occasions over the last six months, was asked to step aside.
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