Greece heads towards default

A deal between Greece and its creditors appeared unlikely in the run-up to this week’s meeting of eurozone finance ministers. The meeting was widely seen as the last opportunity for a deal before a Greek default: it looks set to miss a crucial payment on 30 June. On Sunday, discussions between the two sides broke down and the International Monetary Fund, one of Greece’s creditors, walked out. Greece’s prime minister, Alexis Tsipras, accused the IMF of “criminal responsibility” for Greece’s problems. Greek stocks and bonds slumped.

European creditors said they were making contingency plans for a Grexit, including capital controls to prevent a complete meltdown of Greek’s banking system. The bond yields of other indebted southern European states rose to their highest levels in 2015, as investors began to fret about potential contagion from a Grexit.

What the commentators said

Investors must now consider seriously the risk of a Greek default and euro exit, said Nils Pratley in The Guardian. “Past Greek crises always seemed likely to end in a deal, and did.” But now, at the 11th hour, “red lines are turning scarlet”. There was a feeling this week that “the odds had shifted”, agreed economist.com. Tsipras’s lambasting the IMF was seen either as “brilliant brinkmanship” or “foolhardy bluster akin to telling your bank manager, ‘You’re detestable… lend me a million’”.

It was clearly the latter, said The Times. His “obduracy, dogma and chronic diplomatic ineptitude” have brought Greece to the brink of default. All the uncertainty created by this unnecessary posturing has sent the economy back into recession, and bank deposits are fleeing in the expectation of capital controls and Grexit. Tsipras’s opposition to labour market, taxation and pension reforms is absurd and unsustainable. Pensions cost a ridiculous 16% of GDP due to the extremely low retirement age.

And if Greece left the eurozone, noted The Times, it would still have to make these changes to improve its competitiveness, and under far more stringent circumstances. Nobody would lend to it post-default, and it can’t count on a weak new currency pulling the economy through. Foreign trade only comprises 12% of GDP.

Grexit would be painful for the rest of Europe too, as Philip Aldrick noted in The Times. It “has too much skin in the game”. Eurozone governments have lent Greece €184bn, and the ECB has €118bn on the line. Losses on these loans would be far larger if Greece goes than if it stays and reaches a deal on its debt load. And a Greek meltdown could leave a failed state on the doorstep.

For all the bluster and drama, however, the two sides are not that far apart, as the Financial Times noted. Syriza says it won’t make pension or tax reforms, but it is only being asked to save 1% of GDP
on pensions to reach a savings target. The extremists in Syriza won’t countenance that, while some creditors would rather drop Greece than lend it another cent. Both extremes should be ignored.



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