BRIEFING PAPER

Number 7114, 6 July 2015

Greek debt crisis:

background and
developments in 2015

By Daniel Harari

Inside:
1. UPDATE Recent
developments
2. Summary of events up to 22
June
3. Background to crisis
4. Greek banking system under
pressure
5. Early 2015 negotiations on
extending financial assistance
6. Failure to come to a final
agreement
7. Funding issues
8. What happens if Greece
defaults on its debt?

www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | papers@parliament.uk | @commonslibrary

Number 7114, 6 July 2015

Contents
1.

UPDATE Recent developments

2.

Summary of events up to 22 June

3.
3.1
3.2
3.3

Background to crisis
2010 and 2012 bailouts
Economic depression
January 2015 Greek elections and Syrizas platform

6
6
6
7

4.
4.1
4.2

Greek banking system under pressure

Greek banks reliant on funding from the ECB
Deposit outflows accelerating

9
9
10

5.
5.1
5.2
5.3
5.4

Early 2015 negotiations on extending financial assistance

Funding from the bailout agreement
Difficult negotiations on proposed extension of bailout
Provisional agreement of 20 February
Reaction and analysis of February deal

11
11
11
12
13

6.
6.1
6.2
6.3
6.4

Failure to come to a final agreement

Preliminary plans approved in late February
Failure to agree a more detailed plan
Dissent within Syriza
Possibility of a referendum

14
14
14
16
16

7.
7.1
7.2
7.3
7.4

Funding issues
Upcoming debt repayments
How long until the government runs out of money?
Other possible solutions
A third bailout?

17
17
18
18
19

8.
8.1
8.2
8.3
8.4
8.5

What happens if Greece defaults on its debt?

Consequences of missing IMF debt repayment
Banking system and capital controls
Default does not necessarily result in Greece leaving the Eurozone
What if Greece leaves the Eurozone?
Impact on UK

20
20
20
20
21
22

Cover page image copyright: Acropolis by Damien Shaw. Licensed under CC BY 2.0 /
image cropped.

Greek debt crisis: background and developments in 2015

1. UPDATE Recent developments

This section provides an update (as of the morning of 6 July) to the rest of the briefing
which was written prior to the Greek governments decision to hold a referendum.
Events leading up to Greek referendum

The second financial assistance programme to Greece from the Eurozone bailout
fund was due to expire on 30 June.

Negotiations between the Greek government and its creditors Eurozone

governments/European Commission, European Central Bank and IMF have been
ongoing for months. Discussions have been over what reforms Greece would
introduce including VAT rises and pension reforms in return for the final
instalment of the bailout deal plus other associated payments totalling 7.2 billion.

Greek Prime Minister, Alexis Tsipras, announced late Friday 26 June that there
would be a referendum on Sunday 5 July on whether to accept or reject proposals
from the creditor institutions. The government campaigned for a No vote.

On 27 June, the other 18 Eurozone members blamed Greece for rejecting their
proposals and breaking up negotiations. They stated that as the bailout
programme will expire on 30 June (it has now expired), the remaining funds due
to be given to Greece in the event of an agreement will now also expire.

Therefore the creditors proposals are no longer on the table following the
expiration of the bailout programme on 30 June. The proposals could, however,
be used as a basis for a new third bailout agreement.

Greece missed its 1.5 billion debt repayment due to the IMF on 30 June. Greece
is now cut off from any further funding from the IMF until it repays this amount.

Referendum result

Greek voters decisively backed No, with 61% of the electorate backing the
governments position rejecting previous draft proposals from the creditors.

A number of other Eurozone leaders framed the referendum as a vote on whether

Greece should stay in the euro. This view was rejected by the Greek government,
who say the No vote will boost chances of receiving a favourable deal with
creditors, when negotiations resume following the vote.

Reaction to referendum result

The referendum result provides a political boost to the Greek government and
Prime Minister Alexis Tsipras. He was optimistic that a deal with the other
Eurozone countries would be possible.

Yanis Varoufakis, Greek Finance Minister, resigned on 6 July. His negotiating style
had irked fellow Eurozone finance ministers, and his departure may make it easier
for a deal to be struck.

Early reaction from Eurozone governments outside Greece has been mixed about
the possibility of a deal following the referendum.

French finance minister Michel Sapin said the basis for dialogue between the two
sides still exist.

Number 7114, 6 July 2015

German Vice-Chancellor and economy minister Sigmar Gabriel said negotiations

about a programme worth billions are barely conceivable. A number of Eastern
European leaders have also had sceptical reactions. The Estonian Prime Minister
Taavi Rivas tweeted: Does not look good for the future of Greek people.

Greek banking system under severe pressure

Following the events surrounding the announcement of a referendum on 26 and

27 June, the European Central Bank (ECB) decided to keep providing the Greek
banking system with Emergency Liquidity Assistance but crucially did not increase
it from its current level of 89 billion.

Over the past few months, the ECB has increased this emergency funding to
Greek banks to match the sizable amount of money that has been withdrawn
from banks. Without this emergency funding Greek banks would likely be
insolvent.

With money still being taken out of banks and emergency funding capped, the
only way to keep banks alive was to limit money being taken out of the banking
system.

A bank holiday and capital controls were formally announced on Sunday 28 June
by Greek authorities. This involves banks being shut until at least Monday 6 July
(when it will be reviewed); cash withdrawals from ATMs being limited to 60 per
day per bank card (foreign cards are exempt from this limit); and only foreign
transactions approved by a new government committee will be approved (money
is allowed to come into Greece from abroad). Domestic electronic transactions
wont be affected according to the government.

What happens next?

Many believe the No vote has diminished the prospect of Greece staying in the
Eurozone. The key question concerns how likely the creditors will come back and
offer better terms to the Greek government, which is now calling on debt relief to
be included in any agreement.

Eurozone creditors have said they are awaiting new Greek proposals.

An emergency meeting of Eurozone leaders has been scheduled for the evening of
Tuesday 7 July. This will be preceded by a meeting of Eurozone finance ministers.

A new (third) bailout agreement will be necessary, complicating negotiations.

The immediate concern for Greece is the banking system. Capital controls have
staved off its collapse for the time being, but, despite this, money is running out.
The Greek economy is also suffering given the capital controls.

The ECBs response to the referendum result and its aftermath will be crucial. If it
significantly reduces the money it offers to the Greek banking system, or even
completely withdraws this emergency funding, this would likely lead to Greece
having to create its own currency to keep the banking system functioning.

Even if the ECB maintains the 89 billion in emergency funds it is providing Greek
banks, this may not be enough and even tighter capital controls may be needed.

Greeces funding needs also remain dire. It is due to repay the ECB 3.5 billion on
20 July. Failure to do so may result in the ECB pulling the plug completely on the
emergency bank funding. [See chapter 8 for more on effects of Greece defaulting
on the Eurozone and UK.]

Greek debt crisis: background and developments in 2015

2. Summary of events up to 22 June

Greeces bailout programme ends on 30 June and negotiations to release 7.2 billion
(5.1 billion) in funds to Greece continue.
Failure to come to an agreement
A four-month extension to the current Greek bailout programme was agreed in February.
In the meantime, the Greek government and its creditors the Eurozone, International
Monetary Fund and European Central Bank have failed to come to an agreement on the
economic reforms to be implemented in Greece in exchange for the 7.2 billion in
financial assistance.
Emergency meetings of Eurozone finance ministers and then Eurozone national leaders
have been scheduled for 22 June to try and resolve these differences.
The Greek government is in a funding crisis. It cant borrow on international markets, has
not received bailout funds since August 2014 and has large debt repayments due shortly,
including 1.5 billion to the IMF on 30 June.
Even if an agreement is reached that resolves short-term funding issues, Greece will likely
need another programme of assistance for the longer term.
Greek banks on life support from European Central Bank funding
Greek banks are being kept alive through Emergency Liquidity Assistance (ELA) from the
European Central Bank. This is needed to replace a large outflow of deposits. Official data
show private sector deposits falling by nearly 20% from the end of November to the end
of April. Reports suggest outflows have continued since then and accelerated in the week
of 15-19 June as the end of the bailout programme approached.
If this emergency funding was switched off, as could happen if no agreement is reached
or Greece fails to pay the IMF on 30 June, Greece would likely need to impose capital
controls to limit money leaving Greek banks.
Consequences of Greece defaulting
With the Greek government short of money, it might be unable to pay salaries, state
benefits and suppliers with euros and instead issue IOUs (a form of parallel currency). This
could likely only be used as a short-term measure before Greece would likely leave the
Eurozone and introduce a new currency.
Most economists expect Greeces economy to suffer a sharp recession in the aftermath of
leaving the euro and other Eurozone countries would face the prospect of multi-billion
euro losses on Greek debt they hold. The impact on the UK would come via financial
markets and through the impact Grexit has on the wider Eurozone economy.
Background to crisis
Greeces economy has undergone a severe recession since the debt crisis began in 2010,
with the economy over a quarter smaller now than it was then. Two international bailout
programmes in 2010 and 2012 have provided a total of around 240 billion (171 billion)
in financial aid to Greece. Attached to these loans have been stringent conditions
designed to reduce the budget deficit and improve economic competitiveness.
Against this backdrop of continued severe economic and social pain, the radical left-wing
Syriza party, who promised to reject the austerity measures, won the January 2015
election beating the incumbent centre-right New Democracy party.

Number 7114, 6 July 2015

3. Background to crisis
3.1 2010 and 2012 bailouts
Greeces long-standing public debt problem became a crisis at the start
of 2010. In the face of rising government borrowing costs, the country
first requested international assistance in April 2010. The 110 billion
(79 billion 1) Eurozone-International Monetary Fund (IMF) loans
agreement it received came with strict conditions on economic policy
and reform designed to make the Greek economy more competitive. A
worsening recession and rising public opposition to further austerity
meant the Greek government struggled to meet the conditions of the
agreement. Meanwhile, the prospects of it returning to borrow on the
open market by 2012, as originally envisaged, became increasingly
hopeless.
A second package of financial assistance was agreed with the Eurozone
and IMF in February/March 2012 and was a more complicated
arrangement than the first. As well as the traditional loans and
austerity, the second bail-out involved Greeces private sector creditors
taking losses totalling around 100 billion (71 billion) on their
holdings of Greek sovereign debt: this followed from a belated
recognition that no amount of austerity and loans on their own could
put Greeces debt burden at the time on a sustainable footing. 2 The
second bailout brought the total combined financial assistance to
around 240 billion (171 billion). 3

3.2 Economic depression

The economy entered recession in 2008 and saw persistent contractions
in economic activity until 2014, when growth finally returned. Overall,
real GDP has fallen by over 25% since the depression began. 4 During
the Great Depression, the US economy shrank by a similar magnitude:
26% between 1929 and 1933. 5 (By way of comparison, the UKs
economy shrank by 6% during the 2008/2009 recession.)
Greece - GDP (Q1 2007=100)
Quarterly data (Eurostat)
110
100

UK
Eurozone

90
80

Greece

70
2007 2008 2009 2010 2011 2012 2013 2014

This briefing uses the exchange rate of 1.40 per 1 as of 19 Jun 2015.
For more on this private sector involvement see Reserve Bank of Australia Statement
on Monetary Policy, The Greek Private Sector Debt Swap, May 2012
3
For more see the Library Note The eurozone crisis rescuing Greece, May 2012
4
Hellenic Statistics Authority (Elstat), table 6 quarterly GDP
5
US Bureau of Economic Analysis, National Income and Product Accounts Tables, table
1.1.3 real GDP
1
2

Greek debt crisis: background and developments in 2015

The fall in output has led to a steep fall in living standards and social
conditions. The unemployment rate increased from around 8% in 2008
to 28% in mid-2013, before falling back slightly to 26% by the end of
2014. The youth unemployment rate rose to nearly 60% in 2013 and
was still at 50% in early 2015. 6
Greece - Unemployment rate (%)
Monthly data (Eurostat)
30

Greece

25
20
15

Eurozone

10
5

UK
0
2007 2008 2009 2010 2011 2012 2013 2014 2015

The number of people in work fell by around one million a 20%

decline in the employed population. Wages have declined, poverty has
increased and deprivation has risen. 7 Its no surprise then that many
people in Greece are unhappy three-fifths of people say they are not
satisfied with the life they lead (the EU average is one-fifth) and threequarters say that the financial situation of their household is bad (the EU
average is just over one-third). 8
In 2014 the economy did show signs of stabilising. Growth had
returned, with quarterly expansions in GDP during each of the first three
quarters of the year. The Greek government was even able to sell some
bonds, for up to five years, to investors for the first time in four years.

3.3 January 2015 Greek elections and Syrizas

platform
Despite the tentative signs of economic recovery, the years of economic
depression, high unemployment and austerity led to the radical leftwing Syriza party winning the 22 January 2015 general election, beating
the incumbent centre-right New Democracy party. Syriza fell two seats
short of an overall majority in parliament and thus formed a coalition
with the right-wing Independent Greeks who share their anti-austerity
views. Syrizas leader, Alexis Tsipras, became Prime Minster. 9

Eurostat, Unemployment rate by age

European Commission, 2014 Employment and Social Developments in Europe Review,
15 Jan 2015, p269/308
8
European Commission, Eurobarometer 81, carried out November 2014. Figures on
satisfaction based on the question On the whole are you very satisfied, fairly
satisfied, not very satisfied or not at all satisfied with the life you lead? 41% of
people in Greece were very satisfied or fairly satisfied, compared with 79% across
the whole European Union. Figures on financial situation are based on the question
How would you judge the current situation in each of the following? The financial
situation of your household 25% of people in Greece said it was good or very
good, compared with 65% across the European Union.
9
For more on the election see Library note Greece's new anti-austerity coalition, 28 Jan
2015
6
7

Number 7114, 6 July 2015

Syriza campaigned against the conditions attached to the bailout

agreements and pledged to reverse many of the austerity measures
introduced in recent years, such as the 22% reduction in the minimum
wage. It believes, along with a number of economists, 10 that the cutting
of public spending and tax increases introduced in order to attempt to
reduce Greeces large budget deficit had been counterproductive. It
argues that this led the economy into a vicious negative spiral of weaker
demand causing weaker public finances, in turn resulting in the
imposition of even tougher austerity conditions.
Syriza pledged to stop dealing with the Troika of the European
Commission, the European Central Bank (ECB) and the IMF, who have
overseen the bailout funds and imposed the conditions associated with
them (known as the Memorandum of Understanding).
Syriza said its vow to renegotiate the terms of the bailout agreement
would also include a request for debt relief. Greeces stock of debt is
the second highest in the world at over 175% of its GDP, 11 or 317
billion (226 billion), the majority of which is owed to the Eurozone
bailout funds and therefore ultimately to the other Eurozone
countries. 12 Syriza is committed to keeping Greece in the Eurozone.
Greece - General govt budget balance
% of GDP (Eurostat)
4
0
-4
EC
May'15
forecast

-8
-12
-16

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Greece - General govt gross debt

% of GDP (Eurostat)
200
150

EC
May'15
forecast

100
50
0

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16
*100bn writedown of debt held by private sector

For example Simon Wren-Lewis, Martin Wolf or Paul Krugman; not all economists
agree with this view
11
IMF estimates of gross debt for 2014. Japan has the highest debt ratio at 246% of
GDP.
12
Greece Seeks Third Debt Restructuring: Whos on the Hook?, Bloomberg, 2 Feb
2015
10

Greek debt crisis: background and developments in 2015

4. Greek banking system under

pressure
Greek bank balance sheets are plagued with very high levels of nonperforming loans (where the borrower is not making repayments to the
bank); the IMF estimated in June 2014 that 40% of all loans provided
by Greek banks at the end of 2013 were non-performing. 13 Greek
banks also hold a large quantity of Greek government bonds.

4.1 Greek banks reliant on funding from the

ECB
Shut out of the interbank lending markets, Greek banks are heavily
dependent on funding from the European Central Bank. Although the
ECB on 4 February 2015 stopped accepting Greek bonds as collateral
for funding, it still provides a final lifeline to Greek banks through its
Emergency Liquidity Assistance (ELA) programme. 14 This channels a fixed
amount of funds to the Greek central bank which is then available to
Greek Banks. ELA funding is intended to be temporary and for solvent
banks only. 15 Changes to ELA funding need to be approved by twothirds of the ECB Governing Council. 16
The ECB has raised the cap on ELA funding to Greece in stages from
around 60 billion initially in early February, to around 86 billion by
19 June. 17
Increases in ELA funding are crucial for Greek banks in order for them to
replace an outflow of customer deposits. Private sector deposits in
Greek banks have fallen by 30.6 billion, or 19%, in the five months to
the end of April 2015, to its lowest level in more than a decade. This is
likely a result of the uncertainty surrounding the January election and
the subsequent negotiations on the future of the bailout. 18
The Bank of Greece has stated that the money that is being withdrawn
from banks is largely being hoarded in cash and not being moved
abroad. 19

IMF staff report, Greece: Fifth Review Under the Extended Arrangement Under the
Extended Fund Facility, and Request for Waiver of Nonobservance of Performance
Criterion and Rephasing of Access, Jun 2014, p7
14
ECB press release, Eligibility of Greek bonds used as collateral in Eurosystem
monetary policy operations, 4 Feb 2015
15
Bank funding powers make Greece vulnerable to ECB pressure, Reuters, 15 Feb
2015
16
The main decision-making body of the ECB comprised of six Executive Board members
and the heads of the 19 national central banks; at any one time 21 members having
voting rights the six Executive Board members and 15 out of the 19 national
central bank governors (these are rotated)
17
ECB Said to Allow Greek Banks 59.5 Billion Euros Emergency Cash, Bloomberg,
5 Feb 2015 and ECB boosts emergency funding as Greek banks bleed, Tsipras
calm, Reuters, 20 Jun 2015
18
Bank of Greece statistics, Deposits by sector, 29 May 2015; and Greeks Backing
Tsipras With Votes But Not Cash, Bloomberg, 19 Feb 2015
19
Bank of Greece, The Bank of Greece Report on Monetary Policy 2014-2015, 17 Jun
2015
13

Number 7114, 6 July 2015 10

Greek private sector bank deposits since 2007 (up to end-April 2015)
billion
250
200
150
100
50
0
2007

2008

2009

2010

2011

2012

2013

2014

2015

Note: Private sector referes to deposits held by corporations and households, i.e. excluding govt
Source: Bank of Greece statistics for deposits by sector, 29 May 2015

4.2 Deposit outflows accelerating

The ELA cap was raised twice by a reported total of 3 billion in the
week of 15-19 June to meet accelerating outflows of deposits, with the
Greek government and its creditors still unable to come to an
agreement that would release 7.2 billion in bailout funds to Greece
(for more on this see subsequent sections). Reports say outflows topped
1 billion per day on Thursday and Friday (18 & 19 June). 20
A failure to reach a deal in the emergency meetings of Eurozone finance
ministers and leaders on Monday 22 June will likely lead to further
outflows of deposits. Greek banks will then need more money from the
ELA to plug the gap. This may even be required late on Monday 22 June
when the ECB will met again to discuss whether to raise the ELA cap
again.
Should ELA funding not prove sufficient, Greece would likely need to
impose capital controls to limit the amount of money being withdrawn
from banks.
Given Greek banks large holdings of its governments debt, their
solvency is closely linked to that of the state. A failure to either extend
or replace the current bailout programme would probably result in
Greece defaulting on at least some of its debt (as it would not have the
funds to service it).
If this were to happen the ECB may decide to either reduce or end ELA,
resulting in Greek banks probably becoming insolvent. As a result, the
ECB is keeping a close eye on negotiations surrounding the future of
the bailout programme.

20

European Central Bank Increases Emergency Lending to Greece as Deposit Flight

Mounts, Wall Street Journal, 19 Jun 2015

11 Greek debt crisis: background and developments in 2015

5. Early 2015 negotiations on

extending financial assistance
5.1 Funding from the bailout agreement
Under the current package of assistance, the release of each
disbursement to Greece must be approved by both the Eurogroup (of
Eurozone finance ministers) and the IMF's Executive Board. Prior to this
decision, the European Commission, the ECB and the IMF staff conduct
joint review missions to Greece in order to monitor compliance with the
terms and conditions of the programme. 21 A review is currently
underway.
The existing agreement between Greece and the Eurozone bailout fund,
the European Financial Stability Facility (EFSF), was due to expire on
28 February 2015. 22 The final tranche of loans worth 1.8 billion (1.3
billion) from this fund will only be provided after the latest review is
concluded successfully. An associated 1.9 billion (1.4 billion) held by
the ECB, 23 and a further 3.5 billion (2.5 billion) from the IMF 24 will
also be available after this review is completed, providing a potential
total of 7.2 billion (5.1 billion) in funding to Greece.

5.2 Difficult negotiations on proposed

extension of bailout
With this 28 February 2015 deadline looming, the new Greek
government and its Eurozone counterparts began discussions on how to
proceed. The main forum for negotiations has been the Eurogroup a
meeting of the finance ministers of the 19 Eurozone member countries.
Meetings on 11 February and 16 February ended without agreement. A
further Eurogroup was scheduled for 20 February. Between these
meetings, technical discussions were held and draft statements were
floated.
Over the course of these negotiations, the Greek government proposed
that the existing financial assistance programme be extended for six
months from end-February to-end August 25 and would accept the
European Commission, the ECB and the IMF (renamed institutions
rather than the troika) to continue oversight of the terms of the
programme. It also promised to pay its debts in full. In return it wanted
some flexibility over some of the specific economic reforms contained in
the agreement and for it to be allowed to run a smaller primary budget
surplus this is the budget balance excluding debt interest payments.
European Commission, Financial assistance to Greece [online, accessed 5 January
2015]
22
The agreement between Greece and the IMF runs until 2016.
23
These are profits generated from the ECBs holding of Greek bonds, which were
purchased in previous years
24
IMF staff report, Greece: Fifth Review Under the Extended Arrangement Under the
Extended Fund Facility, and Request for Waiver of Nonobservance of Performance
Criterion and Rephasing of Access, Jun 2014,p55,table 13, fifth review
25
Greece has two large bond repayments due to the ECB in July and August totalling
6.7 billion (4. billion).
21

Number 7114, 6 July 2015 12

These proposals were submitted to the Eurogroup one day ahead of the
20 February meeting. 26

5.3 Provisional agreement of 20 February

On 20 February 2015, the Eurogroup came to a deal that would extend
the financial assistance programme to Greece for four months, up until
the 30 June. 27 The terms of this agreement are summarised below.

Extension of current programme

The current bailout programme will continue, with its deadline extended
from 28 February to 30 June, in order for the institutions of the
European Commission, IMF and ECB to complete their review and
subsequently disburse the 7.2 billion in funding to Greece.

No reduction in debts
Greece will honour all of their financial obligations to those they have
borrowed from.

Bank recapitalisation fund moved to Eurozone

bailout fund
Funds of 10.9 billion (7.8 billion) to support Greek banks will be
moved from the Hellenic Financial Stabilisation Fund (HFSF) to the EFSF
(Eurozone bailout fund) until the end of June and will still be available to
Greek banks if needed. Greece had originally floated the possibility that
it may want to use these funds for purposes other than bank
recapitalisations.

Budget surplus target lowered for 2015

The primary surplus target the budget balance excluding debt interest
payments for 2015, which was 3% of GDP, is scrapped and will now
take economic circumstances in 2015 into account. A lower surplus
would, in theory, allow for higher government spending levels or lower
levels of taxation.

Economic reforms to continue

Greece commits to a broader and deeper structural reform process,
including implementing reforms to tackle tax evasion and corruption
(problems Syriza has said it was keen to tackle). 28

with some flexibility added as Greece allowed to

present its own measures
The Greek authorities won the right to present their own package of
reforms as part of this agreement. These must, however, be approved
by the institutions (EU/IMF/ECB) who will determine whether they are
sufficient for them to complete their review and allow the 7.2 billion in
Copy of letter from Greek finance minister to euorgroup obtained by the Financial
Times, 19 Feb 2015
27
Eurogroup statement on Greece, 20 Feb 2015
28
See, for example, PM Tsipras declares war at home on Greece's 'oligarchs', Reuters,
17 Feb 2015
26

13 Greek debt crisis: background and developments in 2015

bailout funding to be disbursed to Greece. This process was meant to

be completed by the end of April (see section 4 for more on this).
The deal prevents the Greek government from making unilateral
changes to previously implemented structural reforms if this would
negatively affect the budget balance, as determined by the institutions.
This presumably stops, at least in the short term, Syriza from
implementing a number of the measures it had campaigned on during
the election. 29

Possibility of a follow-up arrangement after this

arrangement ends
The Eurogroup statement also mentions that this extension can bridge
the time a term favoured by the Greek government for discussions
on the possibility of introducing another financial assistance programme
once the current one ends at the end of June.

5.4 Reaction and analysis of February deal

This provisional agreement was viewed by most observers as a defeat
for the Greek government given that most of its original demands that
helped it get elected were not included. 30 For instance, The Economist
concludes that Greece drop[ped] nearly all its demands. 31 The Open
Europe think tank believed that Greece seems to have failed to achieve
many of its goals with Greece basically agree[ing] to conclude the
current bailout. 32 Meanwhile, German Finance Minister Wolfgang
Schuble appeared content, commenting that the Greeks certainly will
have a difficult time to explain the deal to their voters". 33
It appears that heightened concerns over the health of Greek banks put
more pressure on the government to come to an agreement as quickly
as possible. Reports suggest that over 1 billion in deposits were
removed from Greece in the two days prior to the agreement. 34 News
of the agreement initially helped ease fears of capital controls being
introduced and Greece leaving the Eurozone.
Greek Prime Minister Alexis Tsipras in a television address to the country
shortly after the deal was reached claimed that We won a battle, not
the war, while also warning that The difficulties, the real difficulties ...
are ahead of us." He and Finance Minister Yanis Varoufakis have said
that this provisional agreement breaks the cycle of austerity that
previous Greek governments had acquiesced to by introducing some
flexibility to the conditions of the loans. However, this provisional deal
still needs to be implemented.
This is summarised in their Thessaloniki programme of policies to reverse past
austerity measures
30
For a summary of opinion see Tsipras Tamed as Economists Declare Greece Loses
Austerity Fight, Bloomberg, 23 Feb 2015
31
Greece and Europe: Outgamed, The Economist online, 21 Feb 2015
32
Raoul Ruparel, Greece bends to Eurozone will to find short-term agreement, Open
Europe blog, 20 Feb 2015
33
Greece, euro zone agree four-month loan extension, avert crunch, Reuters, 20 Feb
2015
34
ibid.
29

Number 7114, 6 July 2015 14

6. Failure to come to a final

agreement
At the time of publication (22 June) Greece still hasnt received any of
the 7.2 billion available to it should a deal be formally approved by the
Eurozone, IMF and European Central Bank. This is due to the failure of
the Greek government and its creditors to agree on what reform
measures will be introduced in Greece in return for the additional
funding.

6.1 Preliminary plans approved in late

February
As per the agreement of 20 February, the Greek authorities submitted
their initial set of reforms to the Eurogroup of Eurozone finance
ministers on Monday 23 February. These included a commitment to
reform value-added tax (VAT) policy in order to boost revenues, fight
corruption, reduce the number of government ministries, review and
control public spending, and commit to not roll back privatisations that
have been completed. 35
The Eurogroup approved this list of measures on 24 February, noting
that this was a valid starting point toward a more detailed list of
policies that would need to be agreed by the end of April. 36 Where
necessary, national parliaments of Eurozone members, including
Germany approved this extension to the bailout (the Greek government
decided not to put the extension agreement to a parliamentary vote).
The IMF and ECB also signalled their approval of the Greek measures,
although both expressed some reservations and emphasised that the
measures were only a starting point. 37 Work then continued on more
detailed plans for these reforms.

6.2 Failure to agree a more detailed plan

Talks between the Greek government and its creditors (other Eurozone
members (usually through the European Commission), the ECB and IMF)
have continued in the following months, without an agreement being
reached. The Greek government has presented proposals for reforms
that its creditors have rejected as being insufficient. 38
The main areas of disagreement are in the following areas:

Labour market creditors propose further reforms to make it

more flexible, while the Greek government wants to rehire some

Greek government reform agenda sent to Eurogroup (23 Feb 2015), via the Financial
Times online
36
Eurogroup statement on Greece, 24 Feb 2015
37
ECB, ECB letter to the Eurogroup, and IMF, Letter by IMF Managing Director Christine
Lagarde to the President of the Euro Group on Greece, both 23 Feb 2015
38
See for instance: Greece fails to reach initial deal on reforms with lenders, Reuters,
31 Mar 2015, and, Greek Proposal on Bailout Standoff Not Acceptable, European
Officials Say, Wall Street journal, 9 Jun 2015
35

15 Greek debt crisis: background and developments in 2015

of the public sector workers laid off under the austerity

programme and to raise the national minimum wage (which was
cut severely as part of the bailout programmes). 39

Pensions creditors want further reforms to the pensions system,

seen by many as overly generous. 40 The Greek government rejects
this characterisation and notes the large cuts the austerity
programme has already made to some pensions.

Budget targets the original bailout deal contained a target for

Greece to run a 3% of GDP surplus on its budget balance
excluding debt interest payments (the primary surplus) in 2015.
The deal to extend the bailout removed this target but did not
replace it. A smaller surplus would allow the Greek government to
spend more or tax less. It appears that the difference between the
two sides is relatively small at 0.5% of GDP per year. 41

Value-added tax (VAT) creditors want to apply a higher VAT

rate to some goods and services. Currently there is a standard rate
of 23%, and two reduced rates of 13% and 6.5%. The Greek
government is reluctant to raise VAT rates on items such as which
include things like food and electricity. 42

Debt reorganisation the Greek government has proposed that

the Eurozone bailout fund buys the 27 billion Greece owes the
ECB, allowing it more time to repay this debt. 43 This plan has so
far been rejected by creditors.

The Greek government feels that if it caves in it will end up

perpetuating what it sees as the mistakes of the austerity programme.
Meanwhile, the other Eurozone members are reluctant to lend billions
of euros of additional loans to Greece if it does not commit to
reforming its economy and improving its public finances.
As well as the clear ideological divided between the two parties, the
negotiations appear to have been acrimonious at times. For example, it
appears that Greek Finance Minister Yanis Varoufakis attitude to
negotiations has not gone down well with a number of his
counterparts, with a number of unfavourable stories about him
circulating in the media. 44
The original 30 April deadline to come to an agreement for a deal has
long since passed. The bailout deal itself expires at the end of June
2015, so if Greece is to receive the remaining 7.2 billion from it, a deal
needs to be reached before then. Emergency meetings of first Eurozone

Greece deal: Seriously, what's holding it up?, CNBC online, 8 May 2015
Starting to list; Greece and its creditors, The Economist, 4 Apr 2015
41
Extension granted: Greece's debt negotiations, The Economist, 4 Jun 2015
42
Plan on the cards for flat VAT rate of 18 pct, Kathimerini (Greek newspaper) online
English edition, 28 Apr 2015
43
18 June 2015 blog post by Greek Finance Minister Yanis Varoufakis
44
See for example, Varoufakis has achieved one thing uniting resentment from
poorer nations, Guardian, 1 May 2015; Mr Varoufakis has responded to these
stories in a blog post, The truth about Riga, 24 May 2015
39
40

Number 7114, 6 July 2015 16

finance ministers and then Eurozone leaders will be held on Monday 22

June to try and come to an agreement.

6.3 Dissent within Syriza

The internal politics of the left-wing Syriza party, who are the senior
party in the Greek governing coalition, could also influence whether a
deal is agreed. Syriza is itself a coalition of radical left-wing groups, and
contains some members who are resolutely against any climb downs
from the stance it took during the election campaign. Following the
February preliminary Eurogroup agreement, a few members of Syriza
expressed their anger at what they saw as the partys failure to honour
its election commitments. 45
The partys radical Left Platform grouping regularly voice their
displeasure at the blackmailing tactics of Greeces creditors and have
influence on the party via its Central Committee. 46 This group wants the
government to reject any agreement that cuts pensions or workers
rights. Some members of the Left Platform have also suggested Greece
should default on its debt and leave the Eurozone. 47
This suggests Prime Minister Tsipras may find it difficult to sell an
agreement between the Greek government and its creditors. The Left
Platform contains roughly 30 MPs, enough in theory to block
parliamentary approval of a deal. 48

6.4 Possibility of a referendum

Some have suggested that Greece should a referendum on whether to
accept the economic reforms being proposed by its creditors. The
German Finance Minister, Wolfgang Schuble, has said he would
support a referendum if the Greek government proposes one:
If the Greek government thinks it should hold a referendum, it
should hold a referendum. Maybe it would even be the right
measure to let the Greek people decide whether theyre ready to
accept what needs to be done. 49

A referendum could also potentially allow Syriza to sign up to a reform

programme that runs against its election promises. Or, if the public
voted against the proposals, it could provide the political support
needed for Syriza to take Greece out of the Eurozone (Syriza
campaigned to stay in the Eurozone; this remains its policy). 50
At the moment this is speculative. Given that the bailout programme
ends on 30 June and given the lack of funds Greece has to meet its
financial obligations (see next section), there may be insufficient time to
hold such a referendum.
Greek bailout: Government reveals economic reforms but Syriza dissenters says it
has gone back on its election promises already, Independent, 23 Feb 2015
46
SYRIZA's Left Platform makes gains but proposal voted down,Kathimerini (Greek
newspaper) online English edition, 25 May 2015
47
Greeces Governing Syriza Party Divided Over Debt Terms, Wall Street Journal, 25
May 2015
48
Of course, this depends on which way the opposition parties would vote
49
Schaeuble Backs Greek Referendum to Break Bailout Impasse, Bloomberg, 13 May
50
Andrew Lilico, Greece: Whats left to do now?, CapX, 11 May 2015
45

17 Greek debt crisis: background and developments in 2015

7. Funding issues
7.1 Upcoming debt repayments
Until a final list of reform proposals is approved by the institutions the
European Commission, IMF and European Central Bank (ECB) there
wont be any distribution of bailout funds to Greece.
Greece hasnt received any money from the bailout programme since
August 2014 and is unable to access international financial markets to
borrow more money. This raises serious questions about its ability to
make a series of upcoming debt repayments. 51
Greece debt repayments due from 20 June 2015 to December 2015
billion
8

ECB

IMF

Treasury Bills (refinance)

6
5
4
3
2
1
0
Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Note: There is also a 25 million payment due to the European Investment Bank in July
Source: Wall Street Journal, "Greeces Debt Due: What Greece Owes When", 18 Jun 2015

Greece has to roll over 3 billion in short-term government debt

(treasury bills) in early July, but these are mostly held by domestic banks,
who will likely renew these loans when they mature, so this should not
be a problem.
More importantly, before then, Greece is required to pay the IMF 1.5
billion on 30 June. This was originally due to be paid in four instalments
over the course of the month, but Greece didnt make the first payment
in early June, instead using an obscure IMF rule which allowed it to
bundle all payments due in June into one payment.
This 30 June payment deadline represents the most immediate funding
problem to Greece. IMF managing director Christine Lagarde warned
Greece on 18 June that about not paying the IMF on time:
It will be in default -- it will be in arrears vis-a-vis the IMF, yes, on
July 1. 52

Another funding squeeze looms immediately after the financial

assistance programme ends at the end of June 2015. Greece needs to
repay the ECB 3.5 billion on 20 July and 3.2 billion on 20 August for
expiring Greek bonds the ECB holds.

51
52

"Greeces Debt Due: What Greece Owes When", Wall Street Journal, 18 Jun 2015
IMF Warns No Leeway on Payment as Merkel Urges Greece to Bow, Bloomberg, 18
Jun 2015

Number 7114, 6 July 2015 18

7.2 How long until the government runs out

of money?
In short, it is hard to know for sure but probably not long.
In recent months, Greece has managed to keep up with its debt
repayments and its domestic obligations to pay social security and
salaries via a combination of measures. These include:

delaying payments to firms that supply the state; 53

ordering public entities to transfer their cash reserves to the Bank
of Greece (worth about 600 million); 54
meeting a 750 million repayment to the IMF in mid-May by
drawing down Greeces reserves at the IMF. 55

Greek government ministers have also repeatedly stated that they lack
cash reserves and talked about the difficulty the government will have in
making meeting upcoming commitments. Minsters have also said that if
the government had to choose, it will prioritise paying pensions and
salaries rather than its foreign debt repayments. 56

7.3 Other possible solutions

Of course, the most obvious solution would be a deal that would allow
the final instalment of the bailout fund to be made to Greece.
Absent this, one possible solution would be for the ECB to lift the limits
it has placed on the Greek government to issues short-term government
debt and on Greek banks to hold it. Lifting these limits would allow
banks to purchase newly-issued government debt, providing the
government with more money to make its debt repayments. However,
the ECB is reluctant to do this as it may break its rules against financing
governments via monetary policy. This is due to Greek banks reliance on
its own central bank for money; Greek banks use treasury bills as
collateral to borrow money from the Greek Central Bank, which it then
can use to buy more treasury bills from the government. 57
Another option would be to loan some money from the Eurozone
bailout fund set aside to stabilise Greek banks, the Hellenic Financial
Stabilisation Fund, to the Greek government. There is currently 10.9
billion remaining in this bank rescue fund, which is intended to
contribute to the maintenance of the stability of the Greek banking
system, for the sake of public interest. 58 This money resides with the
Eurozone bailout fund, the European Financial Stability Facility. The
Greek government during talks in February 2015 had initially requested
to use this money for purposes other than bank recapitalisations.
Putting off payments led to Q1 budget primary surplus, Kathimerini (Greek
newspaper) online English edition, 17 Apr 2015
54
ECB Spares Greece for Now as Schaeuble Seeks Substance on Plans, Bloomberg, 12
May 2015 and Bruegel think tank, Greeces hot summer,14 May 2015
55
Greece taps reserves to pay IMF loan, BBC News, 12 May 2015
56
Varoufakis: Greece would prioritise pensions and salaries over IMF payment,
Reuters, 20 May 2015
57
"ECB Could Lift Cap on Greek Short-Term Debt Issuance if Deal in Sight", Wall Street
Journal, 30 Apr 2015
58
HFSF website, About - What we do [accessed 19 June 2015]
53

19 Greek debt crisis: background and developments in 2015

7.4 A third bailout?

Even with a deal on the current bailout programme, Greece will likely
need a further, third package of financial assistance as the current
programme ends on 30 June. This is because Greece is still unable to
fund itself via international markets. The 7.2 billion it would receive if
an agreement is reached under the current deal would likely only allow
Greece a few months respite, before funding pressures would return.
The Eurogroup statement following the 20 February provisional
agreement mentioned that the extension allowed time for discussions
on a possible follow-up arrangement. 59 So far this hasnt happened (at
least publically) as attention has been focused on finalising the
provisional deal of the existing bailout programme.
Discussions on a third bailout package are likely to be even more tense
and difficult, as the legal conditions attached to the second bailout will
have expired and the Greek government will likely wish to include more
of its election campaign promises, such as reducing its debt interest
burden or restructuring (reducing) some of its debts. Against such a
position, would the other Eurozone nations, and Germany in particular,
be willing to agree, while simultaneously providing more funding?

59

Eurogroup statement on Greece, 20 Feb 2015

Number 7114, 6 July 2015 20

8. What happens if Greece

defaults on its debt?
With the Greek government running short of money, the possibility that
it will be unable to make upcoming debt repayments has risen. What
are the likely scenarios if this happens?

8.1 Consequences of missing IMF debt

repayment
It all depends on who Greece defaults on and how Greeces creditors
react. The next debt repayment is 1.5 billion to the IMF on 30 June,
followed by 3.5 billion to the European Central Bank (ECB) on 20 July.
The government also needs to make regular social security payments
and pay the wages of the civil service.
If the Greek government fails to pay the IMF, the IMFs managing
director has said it would consider Greece to be in default. 60 While
failing to repay the IMF would in itself have serious consequences in due
course, its importance in the short-term depends on how Greeces
European creditors react.
The Eurozone bailout fund, the European Financial Stability Facility,
could then declare Greece to be in default as well, potentially causing
an adverse reaction in financial markets. Alternatively, it could decide to
take a wait-and-see approach to developments. 61

8.2 Banking system and capital controls

The most important impact from Greece missing a debt repayment
could come via the banking system. If Greece fails to pay the IMF on
30 June, the ECB will have to decide whether to keep in place its
emergency funding of Greek banks (see section 4 for more). The ECB
may decide to completely withdraw this funding or to reduce it given
that Greek banks use bonds issued by the government - which would
now be in default - as collateral to get these emergency loans. 62
If the ECB did halt its emergency funding, the Greek government would
likely have to introduce capital controls, limiting how much money
customers can withdraw from banks.

8.3 Default does not necessarily result in

Greece leaving the Eurozone
The introduction of capital controls does not mean that Greece would
immediately leave the Eurozone. As part of Cyprus bailout by the
Eurozone and IMF in 2013, capital controls were introduced while
Cyprus remained in the Eurozone (they were lifted fully in April 2015).
IMF Warns No Leeway on Payment as Merkel Urges Greece to Bow, Bloomberg, 18
Jun 2015
61
What happens next if Greece defaults on IMF?, Reuters, 19 Jun 2015
62
Investors eye consequences of a Greek default, Financial Times, 20 May 2015
60

21 Greek debt crisis: background and developments in 2015

With the Greek government short of money, it might be unable to pay

salaries, state benefits and suppliers with euros and instead issue IOUs (a
form of parallel currency). In theory, the IOUs would have the same
value, being backed by government. However, given the circumstances
in which they were issued, those receiving them would likely prefer to
be paid in euros. As a result, an unofficial exchange rate would develop
between IOUs and euros, with IOUs worth less. 63
IOUs could likely only be used as a short-term measure, as confidence in
this new monetary system would likely be low. 64

8.4 What if Greece leaves the Eurozone?

If Greece introduced capital controls and IOUs, the likelihood is that this
situation would not be sustainable nor necessarily desirable for Greece.
This then may lead to Greece formally leaving the Eurozone and
introducing a new currency.
This new currency would probably depreciate significantly against the
euro (estimates vary, but some suggest it could fall by as much as 50%).
This would make it much more expensive for Greece to import goods
and services from abroad and therefore lead to a rise in inflation. Most
economists expect the Greek economy to suffer another steep recession
if it did leave the Eurozone.
How much debt Greece would actually default on would depend on a
number of factors. But we know that the ECB, IMF and other Eurozone
countries hold around three-quarters of all Greek debt. Germany, as the
largest economy in the Eurozone, may face total losses of over 50
billion and possibly more. 65
Nevertheless, there appears to be greater confidence than there was a
few years ago that a Greek exit could be contained, due to banks
reducing their exposure to Greece, and the ECB now able to intervene
in financial markets and buy government bonds of countries facing high
borrowing costs.
There is, though, disagreement among economists and commentators
on the extent of possible contagion spreading to other Eurozone
countries and to the wider Eurozone economy. Some feel that once it
has been shown that being in the Eurozone is not irrevocable, the
Eurozones credibility will be permanently damaged. 66

Here's the brutal reality for ordinary Greeks if the government defaults, Business
Insider, 19 May 2015
64
For more on IOUs, or scrip, see Scrip tease: Greece could alleviate its shortage of
cash by issuing IOUs, but only for a time, The Economist, 26 Apr 2015
65
The Greek debt: what creditors may stand to lose, Guardian, 19 Jun 2015
66
See for instance, Robert Peston, BBC News economics editor, blog post How serious
for us is the Greek tragedy?, 16 Apr 2015
63

Number 7114, 6 July 2015 22

8.5 Impact on UK
The direct impact on the UK economy of Greece leaving the Eurozone
(Grexit) would probably be small. Greece, for instance, accounts for
only 0.6% of total UK exports and its economy accounts for less than
2% of total Eurozone GDP. 67
The UK, however, would likely be affected indirectly via the financial
markets and via the wider Eurozone economy.
Financial system
The impact on the financial markets of Grexit would depend on
whether it was viewed as orderly or disorderly. An orderly exit might
involve the EU institutions making commitments to help Greece
transition to its new currency, while pledging to support other Eurozone
countries - and banks - who might now come under pressure. Such as
scenario may limit the contagion and result in only a short term reaction
in markets.
A disorderly Grexit where Greece is forced to introduce a new currency,
perhaps shortly after the collapse of its banking system, and with
minimal intervention by European authorities, could lead to a prolonged
reaction on financial markets. Although British banks exposure to
Greece is relatively small, the UKs large financial sector could still be
impacted via contagion in the wider Eurozone financial system.
Eurozone economy
Another channel through which Grexit could affect the UK economy
would be via the Eurozone economy. The UK exports 39% of its goods
and services to the Eurozone and many businesses have deep
connections with it. Falling business and consumer confidence could
knock the Eurozone back into recession.
Confidence in the UK may also be hit given the uncertainty, potentially
causing businesses to hold back investments and consumers to rein in
spending.
Contingency plans
The Bank of England Governor Mark Carney has stated that the Bank is
not complacent about risks to the UK economy resulting from a Greek
Eurozone exit, but doesnt believe the impact would be large:
an intensification of the Greek crisis would have an impact on
global growth and would have a modest impact on UK growth. 68

Chancellor George Osborne has also stated that the government has
taken steps to limit the impact of Grexit:
In the UK we've taken the measures to increase our economic
security so we can deal with risks like this from abroad. And
clearly now we must go on and complete that plan. 69

ONS, Pink Book 2014, table 9.3; data for 2013 (latest available on 22 Jun 2015) and
Eurostat, national accounts figures for 2014 [accessed 22 Jun 2015]
68
Bank of England Inflation Report Q&A,13th May 2015, page 24
69
Osborne: EU must 'prepare for the worst' in Greek crisis, ITV News, 19Jun 2015
67

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