Explaining Greece's Financial Disarray

What are Greece's immediate financial problems?

Greece is currently dealing with three key problems:

1. Liquidity problems. Tax collection is declining, and the European Union and the International Monetary Fund recently warned that Athens failed to meet its primary surplus target for 2014. In recent weeks, EU officials have suggested that Greece may need a third bailout by midyear; several figures have been mentioned recently, but the bailout would probably be around 30 billion to 50 billion euros.
2. Substantial debt repayments for the rest of the year. Greece has debt repayments to the IMF between March and July, and to the European Central Bank between July and December. So far, Athens has been repaying its debt to the IMF, but only after tapping the reserves from social security funds, ministries and state-owned companies.
3. Bank deposit outflows. Some 20 billion euros have left the Greek banking system since December. The outflows temporarily slowed down after Athens reached an agreement with its lenders on Feb. 20 to extend its bailout program for four months. But on March 18, Greek banks saw deposit outflows of between 300 million and 400 million euros — the highest in a single day since the February agreement — after the head of the Eurogroup, Jeroen Dijsselbloem, suggested that Greece could be forced to implement capital controls. 

What does Greece want from its lenders?

Greece is expected to present a more comprehensive list of economic reforms in the coming weeks. After Athens makes its proposals, a special Eurogroup summit will probably be called to debate the situation. Greece has short-term and long-term requests for its lenders:

• Short-term requests: Greece needs money and it needs it as soon as possible. Greece will ask the European Union to release the final tranche of its bailout immediately. Greece will also ask Brussels to authorize Athens to issue a larger amount of treasury bills.
• Long-term requests: By late June, Greece will request a debt swap to reduce its debt burden. The European Union will continue to oppose debt write-downs and will offer longer maturities and lower interest rates. Syriza is likely to abandon its electoral promise and accept this offer, but the key issue in dispute will be the economic reforms linked to the deal.

Could Greece be forced to introduce capital controls?

Brussels does not have the authority to impose capital controls on Greece, but it could back Athens into a corner, leaving no option but to proceed. If deposit flight accelerates, Athens could be forced to introduce capital controls to protect the Greek banking system. So far, Greece's banks have been kept alive thanks to liquidity assistance from the European Central Bank — through the emergency liquidity assistance (ELA) program. But capital controls could become necessary in the following circumstances:

1. The ECB stops providing emergency funding to Greece. If Greece fails to reach an agreement with its lenders, the ECB could stop acting as Greece's lender of last resort. This would probably generate fears among savers and lead to a run on Greece's banks, which would force Athens to introduce capital controls and a bank holiday.
2. The ECB refuses to raise the limit on its liquidity assistance. The bank is in charge of deciding the amount of money available for Greek banks through the ELA program. If the deposit outflows accelerate and the ELA program is not increased, then Greek banks would not be able to replace the lost deposits with ECB funding. Over the past weeks, the ECB has raised the limit of funds available for Greece, but not as much as Athens wants.

Would capital controls solve Greece's problem?

While capital controls would temporarily stabilize Greek banks, they would not solve Athens' liquidity problems. Capital controls could be introduced if Athens needs to buy a few extra days or weeks to negotiate with its lenders, especially after the bailout program expires in late June. But it would not mean a permanent solution to Greece's funding problems. If Greece fails to reach an agreement with its lenders, capital controls would probably be followed by the introduction of a parallel currency to keep the Greek state and banks functioning.

What actors will Stratfor be watching?

In the coming weeks, Stratfor will be watching the behavior of three major actors:

1. The Eurogroup. The Eurogroup is confident that it can progressively put pressure on the Greek government, forcing Athens to start making concessions. According to the agreement that Athens reached with its lenders on Feb. 20, the Eurogroup has until late April to make a decision on the release of the final tranche of Greece's bailout. As a result, the Eurogroup believes it still has room to pressure Athens.
2. Greek depositors. Savers in Greece are very sensitive to the evolution of Athens' negotiations with its lenders. Stratfor will be watching deposit outflows on a daily basis.
3. The Greek government. Opinion polls show that 60 percent of Greeks want their country to remain in the eurozone, even if it means the continuation of the austerity measures. But Syriza campaigned on the promise of keeping Greece in the euro as well as stopping austerity measures. Greece's recent promises to the Eurogroup have created tensions within Syriza, with some members feeling that Athens has conceded too much. While the Greek government is still very popular, recent opinion polls show that support fell from 83 percent in early February to 59.8 percent in late March.

What happens next?

The March 19 promise by Athens to present a list of economic reforms to its lenders is intended to assuage doubt and secure the disbursement of the final tranche of its bailout program. The Eurogroup will, however, continue its strategy of pressuring Greece to obtain concessions. Greece's lenders will probably decide to break the final tranche of the bailout into smaller installments, continuing to pressure Athens to introduce reforms.

Even if Greece receives the final tranche of its bailout in the coming weeks, capital controls will be on the negotiating table once more when Greece's bailout program ends in late June. Without a bailout program, Athens will be on its own, facing the decision of whether to ask the European Union for more money, return to debt markets — which at this point seems unlikely because of Greece's high borrowing costs — or default on its debt. Capital controls could be introduced to buy some time for Athens and its lenders to negotiate Greece's future.

Further Stratfor Analyses on Greece

To Prevent a Crisis, Greece Promises Reforms - Greece needs support from its lenders to get its next bailout tranche, but problems will resurface when the funds run out.

Greece Taunts the EU With Austerity Referendum - Greece's Syriza party must decide whether to please its constituents or its eurozone lenders.

Greece: EU Deal Leaves Questions Unanswered - Greece and its lenders reached a deal Feb. 20, but the agreement postpones several important issues.

Greece Stands Alone in Its Fight for Debt Relief - Domestic political constraints will prevent other debtor countries from coming to Athens' rescue.