The Greeks certainly know a thing or two about drama (and possibly drachma too). In a stretched out, will-they-won’t-they story that’s admittedly more Hollyoaks than Euripides, the nation has repeatedly come to the brink of financial disaster, only for crisis to be averted at the last minute.
You could be forgiven therefore for taking the news that Greece faces imminent default with a generous pinch of salt. Relations between the Greeks and their European creditors do seem to have reached an all-time low, however, with only days to go before yet another ‘last-chance’ meeting to prevent a dreaded debt default.
The Greeks walked out of talks in Brussels last night after 45 minutes. Last week, the IMF flew its negotiators back to Washington rather than try to hash out a deal, while a European Commission spokesman today said there were ‘significant gaps’ between the two sides.
The Greek government issued an unofficial ‘non-paper’ reiterating its rejection of creditors’ austerity demands, saying ‘the experiment has lasted long enough’. Meanwhile, German vice-chancellor Sigmar Gabriel wrote that ‘not only is time running out, but so too is patience across Europe’.
These aren’t just words. Greece has to pay a cool €1.5bn (£1.1bn) to the IMF by the end of the month, but can’t get access to the funds it needs to pay without meeting the demands of its ex-troika of creditors, who agreed to a bailout extension in February in exchange for fiscal reforms.
Greece has already submitted proposals that it says satisfy those demands, but the creditors are having none of it. This Thursday, the Eurogroup finance ministers are scheduled to meet for the final time before the June deadline passes, meaning Greece’s last, best chance to clinch a deal is only days away.
The main sticking point is pensions. The IMF’s chief economist Olivier Blanchard wrote in a blog post that Greece should cut its pension bill from 16% to 15% of GDP as a way of increasing the budget surplus. The Greek non-paper, however, said ‘in no uncertain terms, that no reduction in pensions and wages or increases, through VAT, in essential goods - such as electricity - will be accepted’.
That’s not boding well for a compromise, but the alternative doesn't look pleasant. While the IMF won’t exactly come round and break Greece’s legs if it doesn’t pay, the effects on its economy would be much the same. Capital controls and the collapse of the banking system are not a good look for any country, even one as battered as Greece already is.
The stakes are high for Europe too, as default could well force Greece out of the Euro, doing potentially fatal political damage to the project and opening up the possibility of the ‘contagion’ spreading to other debt-ridden southern European economies. This time next year we could well be talking about Spexit or Portuxit, and no one in Brussels wants that.
A lot can happen in the next few days and weeks of course. It’s perfectly possible the two sides could clinch a last minute agreement, or more likely form another fudged compromise that temporarily alleviates the problem with the release of funds without resolving the key differences.
As Sigmar said, however, patience is wearing thin, not just politically but also in the markets. Greek banks continue to haemorrhage money, confidence in Greek bonds continues to fall (yields rose over 60 basis points from Friday to 11.8%) and Greek stocks continue to lose value (a 6% fall this morning means the ASE index has now dropped 42% in the last year).
That situation simply can’t go on forever, and it won’t be righted until a concrete agreement is made. Fudge will only hold things together for so long.