What’s Next For Greece?

It is a bit too familiar, isn’t it? Greece received a new loan so it can service its debt to the official creditors. In exchange for the funds, of which practically none stay in Greece, the government has promised to carry out the reforms that the past few governments had agreed to but failed to implement. Greece may no longer be in arrears to the IMF, but it is making ends meet by delaying payments to local service providers. 

Last week, the Greek parliament approved the list of what the creditors call “prior actions,” committing the Greek government to those past reforms. Tomorrow parliament will vote on two other measures; the Bank Recovery and Resolution Directive (BRRD) and a bill that modernizes the judicial system. These measures are less controversial than last week’s, but a few more Syriza MPs are likely to defect.  

The BRRD is an important measure that will eventually be enacted throughout Europe. It allows for senior bond holders and depositors will bear the cost of a failed financial institution before tax payers money will be used. Many countries have not passed the directive. In May, the EC gave Italy, France, and nine others EU countries two months to approve BRRD. 

In Greece’s case, invoking such measures may be counterproductive. With the banks re-opening  for the first time in three weeks and capital controls still in place, confidence in the financial system is poor. Many are fearful that one way or the others, depositors are at risk of either a tax or confiscation of deposits over the 100k euro insurance threshold. This fear encourages deposit flight, and in turn, prevents the lifting of capital controls. 

Greek deposits have fallen by 34 bln euros since last October. Many of those with the means to set up offshore accounts have probably done so. There is much precedent (not only in Cyprus but in the US too) of not protecting deposits beyond the insurance level.