Greek financial markets were sent reeling yesterday by the news that senior European Union officials have formally discussed a debt default by Athens for the first time and multiplying signs that negotiations over a cash-for-reforms deal have stalled.
The Greek stock market sank more than 5.9 per cent, with the stricken country’s highly vulnerable banking sector losing almost 10 per cent of its value in trading. The price of Greek sovereign debt also fell sharply, with two-year government bond yields, which move inversely to prices, rising by 123 basis points to 25.5 per cent. Ten-year bond yields spiked 51 basis points to 11.5 per cent, reflecting growing expectations of the eurozone’s first formal default.
Diplomats who were in the Slovakian capital of Bratislava to plan next week’s meeting of eurozone finance ministers in Luxembourg on 18 June discussed what could happen to Greece at the end of June. And according to Reuters, a successful cash-for-reforms deal was judged the least likely result. Two other possibilities were another extension of the current bailout programme – and outright default.
Greece needs to repay €1.6bn to the IMF by the end of the month and any failure to do would be a technical sovereign default that could trigger a financial crisis in the country and a eurozone exit. Separately, the German tabloid Bild reported that the German government was looking at how Athens might introduce capital controls to restrict bank withdrawals in the event of default. Greek savers have been yanking their cash out of the country ahead of a possible euro exit.
The president of the Eurogroup of eurozone finance ministers, Jeroen Dijsselbloem, sought to turn up the heat on Athens yesterday, echoing the hard rhetoric of Donald Tusk, the European Council President, who told Athens a day earlier to “stop gambling”. “We’ve repeatedly explained to the Greeks how little time there still is and how important the matter is,” Mr Dijsselbloem said.
The German Chancellor, Angela Merkel, adopted a more mollient tone, saying the talks must continue, despite the dramatic departure of the IMF delegation from Brussels on Thursday. “Where there’s a will there’s a way, but the will has to come from all sides. That is why I think it’s right that we talk to each other again and again” she said.
The Greek government is now being told that it must accept the EU/IMF reform demands by the 18 June meeting if it is to get its money by the end of the month, since some national parliaments will need to ratify the agreement before the €7.2bn bailout funds can be transferred. Despite the market turmoil the Greek State Minister, Alekos Flabouraris, expressed the belief that a deal could be done.
“To clinch a deal at the 18 June Eurogroup meeting of finance ministers in time for the 30 June expiry of the current bailout deal, the Greek government has to shift its position very soon – that is, within about three days,” said Holger Schmieding of Berenberg Bank.
The two sides are still at odds over key elements of the reform programme being pushed by the creditors.
Greece and its creditors: Q&A
Q | Why is this Greek crisis different from all the others that there have been over the past five years?
A | Because Greece really is about to default this time. In previous legs of the crisis there was plenty of tension but never any imminent danger that the country would fail to pay its bills.
Unless Athens stumps up €1.6bn to the International Monetary Fund by the final day in June, it will be in a technical sovereign default. This would very likely result in the country’s banks going bust and a financial crisis that would push Greece out of the single currency. The problem is, Athens almost certainly does not have the €1.6bn to make the payment. The economy is in recession, tax revenues are down and it must use any funds that do come in to pay public sector workers.
Q | Can’t Athens borrow the money?
A | That’s the idea. The IMF and Greece’s European neighbours have agreed in principle to release a €7.2bn payment to the country. This would enable Athens to pay its debts this month and avoid a default. But there’s a problem. The creditors are refusing to hand over the money until the Greek government agrees to a host of tough structural reforms. The creditors fear that if they release the money without a commitment to these reforms Greece will simply fall back into crisis in a few years and need even more money.
Q | What are these reforms?
A | They include liberalising labour market regulations, cutting back pensions and increasing VAT. The creditors also want Athens to promise to run budget surpluses for an extended period in order to reduce its national debt.
Q | So why doesn’t Greece just sign up to the reforms?
A | Because the government was elected in January on a very clear anti-austerity platform. The Greek Prime Minister, Alexis Tsipras, says he cannot accept the reforms because he would be betraying the demands of the Greek people. The Greeks also think some of the reform demands would be counterproductive and damage the Greek economy. They point out that the creditor’s previous demands – implemented by previous Greek governments – pushed the country into a massive economic depression and created mass joblessness.
Q | Can’t a compromise be reached?
A | Again, that is the hope. The European side has given some way on the budget surplus demands. And the Greeks say they have moved on pensions and the labour market. It’s probably in the interests of both sides to do a deal. The Greek economy and people would suffer hugely if it crashed out of the single currency. It would similarly be a grievous blow to the prestige of the EU if Greece fell out. But there is also a rising risk of an accidental default. Even if creditors release the funds they may not arrive in time for Athens to make the IMF payment.Reuse content