Greece: Deal with Creditors or Face Disaster, Bankruptcy and the New Drachma


By Nicholas Economides, Stern School of Business, New York University

Greece is running out of cash fast. Elected on the promise to disburse large amounts to those hurt by austerity, the new leftist Greek government cannot even pay the regular obligations of the State. Within a few weeks, Greece will not be able to pay salaries, pensions and loan obligations to the International Monetary Fund and other lenders. The clock is ticking and time is running out. Greece must grasp the only lifeline left and negotiate with creditors now to save itself.

By the middle of May, Greece will need to refinance €2.8 billion of its Treasury bills. Typically, Greek banks buy most T-bills, but the European Central Bank has placed restrictions on these purchases. So, Greek banks will be unable to buy expiring amounts held by foreign banks. As a result, Greece is faced with the burden of covering €700 million worth of new T-bills, as well as repay €774 million to the International Monetary Fund (IMF) on May 11. That’s a total of €1.474 billion, which doesn’t include paying salaries, pensions and other government expenses.

Greece also faces a significant shortfall of tax revenue since many Greeks expected the government to reduce, forgive or postpone tax obligations. With very little reserves to save the country from bankruptcy, the government has forcibly appropriated the cash reserves of pension funds, municipalities and EU agricultural and major works subsidies in transit. By June 18, Greece would need to spend €4,361 billion, which includes €2 billion in T-bills, as well as repaying €2,361 billion to the IMF.

What is the solution? By far, the best solution is for Greece to strike a reasonable deal with its European Union and IMF creditors. The creditors would provide new cheap financing (present EU/IMF financing is at 1.82% interest rate) and Greece would implement government cuts, restart privatizations, allow competition in closed sectors (such as trucking and pharmacies), and liberalize the labor market to make the economy more competitive. The present government was elected on a platform that promised exactly the opposite of what is required today. But a sharp U-turn is necessary for Greece not to go bankrupt.

If a deal with the creditors is not struck, one of two scenarios are likely to happen. In the first, “bankruptcy within the Euro” would occur. This is what the government seems to prefer — a situation in which Greece keeps paying salaries and pensions only. Since it does not pay the external loans, including money it owes the IMF, the country effectively goes bankrupt. Banks would struggle to survive as officials implement measures to keep citizens and investors from pulling their money out of the banks and out of the country. The ECB will have to decide whether to keep supporting Greek banks in a Eurozone country in default. Eventually, Greece will adopt a New Drachma either forced by the ECB and the Eurozone or voluntarily by the Greek government which will find it extremely hard to function effectively under a bankruptcy within the Euro.

In the second scenario, Greece would pay the external loans with euros, but pay salaries, pensions and other government expenses with an ‘I Owe You,’ or alternative currency, which would quickly become a new internal, highly devalued currency. Banks may be precluded by the ECB from accepting them, but, one way or the other, they will be exchanged at a deep discount to euros by a frightened and impoverished population. Capital controls and withdrawal limits will be imposed. Pretty soon the ‘I Owe Yous’ will be named the New Drachma.

In both scenarios, within weeks or months, Greece would abandon the euro leading to catastrophic conditions. Greek banks would struggle with bank runs and eventually collapse. Since the new currency would be highly devalued, prices for goods and services would rise rapidly, impoverishing Greece to levels reminiscent of incomes in the 1950s. As a result of bankruptcy, the country would struggle with a shortage of credit, causing a shortage of key imports, such as fuel and medicine. From the central nucleus of Eurozone, Greece would become a small Middle Eastern country at the mercy of the strong countries of the region, and especially Turkey.

In either scenario, the downside of bankruptcy is so bad that the possibility of a deal with creditors to avoid it is almost too good to be true. But the Greek government, elected to push for a good deal but stay in the Euro, instead seems to revert to its extreme left roots. Its ministers talk about a “rupture with the creditors” the prime minister states “Greek Democracy cannot be blackmailed,” and a significant number of its MPs openly supports the disastrous transition to a New Drachma. Now is the time of the difficult decision of making the deal with EU and the IMF despite the political cost. Otherwise, only a miracle can save Greece from impending disaster.

This article is based on “Greece: need for immediate agreement with creditors” published in Greek in Kathimerini and “At this point, only a miracle can save Greece from disaster” published in Fortune Magazine.


  1. They need to join the rest of the civilised world and start paying taxes to support the welfare economy they have created.

    Not Germany, not Europe, not the IMF created this Greek system of welfare, tax evasion and corruption….yet they expect them to bail them out.

    I don’t agree with austerity but I cannot help but think that they get themselves in this position.

    After the rot to set in during the 1980’s, it was only a matter of time before this was going to happen.

  2. Idiotic rant from a fear-mongering economist obviously in the fold of the IMF, ECB and private Euro banks. Just plain stupid. The Greek people are smarter than this. If Greece defaults, it will free up 5 billion a month that can be recycled into the economy for growth, salaries, pensions etc. This economist makes it sound like the sun will stop shining and not a single tourist will visit Greece this year, even though many are projecting a record number perhaps over 25 million tourists.

  3. This article is fear mongering drivel. Yes, Greece would go through a traumatic adjustment and the economy would suffer a sharp downturn, even from its current state of depression. But the Greek people are resilient and smart enough to rebuild their economy and let Greece stand on her feet again. Countries, including Germany, have defaulted before. For Greece, unless the EU offers something significantly improved from the slow death of austerity, it may be best to default.

  4. So you are implying that it is ok to borrow money and never pay it back?

    If that’s the case, can I borrow €1000 from you?

  5. Yes, but Germany has learnt its lesson. Greece has defaulted many times before (since independence), and hasn’t learnt anything

  6. Because ,as you know, the govs of the other 19 countries will have to explain why the taxpayers in their countries will never see a penny back off all those debts if there will be a grexit.
    They will have to explain why they were so generous with that money for Greece, though all countries in the eu had to economize.
    Exept this political issue and flop not keeping the eurozone together there is no reason to be rid of Greece, the situation has changed the last 5 years.
    In fact i believe for the credibility of the euzone its better Greece leaving it.
    Otherwise it seems that if you dont follow the rules agreed longtime ago are profitable and you van get away with it.

  7. What welfare system in Greece? You must be joking. No dole, no social housing, no free access to medical care, no benefits, and only 9% of the population eligible for unemployment. There IS no welfare system by any northern European definition of the word,

  8. You need reading lessons since that is neither what she implied nor said.
    We could all say the same of Germany of course. Greeks are still waiting for forced loan repayments.

  9. Perhaps you should explain to a European audience how and in what ways Germany has learned her “lesson”. The French, English, Poles etc. are waiting to hear. On evidence so far Germany has learnt nothing.

  10. You wrote and I quote: “Because, as you know, the govs of the other 19 countries will have to explain why the taxpayers in their countries will never see a penny back off all those debts if there will be a grexit. They will have to explain why they were so generous with that money for Greece”

    For Greece? You mean for INTERNATIONAL BANKS don’t you! The EU-ECB-IMF bailout funds are transferred to Greece, but they don’t stay in Greece for a single day, nor are these funds spent on creating jobs in Greece, these Troika bailout funds are transferred immediately by the Greek government to repay international banks that have made loans to Greece.
    The governments of eurozone nations are afraid that they will have to explain to their citizens why they were so generous with transferring their taxpayers money so that international banks could avoid taking losses on irresponsible loans they’d made to Greece. That is what Merkel, Hollande, etc fear the most. Merkel, Hollande (Sarkozy before him) etc betrayed their taxpayers, they knowingly transferred their taxpayers money to international banks using Greece as the middleman, fully aware that these taxpayer euros would never be recovered. An infant could tell that they’d never be recovered. Merkel and at that time Sarkozy raped their own citizens to pay off international banks.

  11. No, I mean for Greece as Greece had and has to pay interest over loans it got in the past.
    Thats rather normal all over the world paying interest you know.
    Its staggering that noone in Greece understands that bearing credit costs money, i wonder in what kind of world you live …

  12. I might ‘need’ reading lessons, but I say that you need a reality check.

    Stop focusing on a loan that you will never get back, You have done without it since the end of WW2, and start focusing on dealing with real issues that have embarrassed every Greek, including: corruption, blatant tax evasion, cronyism and clientelism.

    Lets not mention the bureaucracy to start a business in Greece or the lack of industrial base.