Greece faces yet another make-or-break deadline – get used to it

published 11 May 2015

150511-greece — The IMF's Christine Lagarde and Greece's Yanis Varoufakis all smiles for now.

Let's take a break from British politics this morning. The in-trays and the infighting can wait for the moment.

If you're a MoneyWeek reader and you haven't already logged on to listen to our post-election podcast and pick up your full report on how the result affects the major asset classes, you can do so here.

Meanwhile, it's time to catch up on another long-running saga.

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The never-ending story of Greece's travails.

Greece an embarrassment to the IMF

Greece still doesn't have enough money to keep paying its debts and its public servants. Greece still wants the troika' (European Commission, European Central Bank, and the International Monetary Fund) to dish out a bit more cash. But the troika' is reluctant to do so unless Greece actually comes up with some sort of economic plan that indicates a willingness to reform.

This week there's another big deadline. Eurogroup ministers are meeting again today for what looks to be another fruitless attempt to reach agreement. Then tomorrow, Greece needs to pay the International Monetary Fund (IMF) €750m. "One way or another," says the FT, "it must be repaid and be repaid on time".

The problem now is that the IMF doesn't want to end up looking stupid. In 2012, only Somalia, Sudan and Zimbabwe were more than six months behind on their payments to the IMF. Greece could blow that credit record, particularly as it has been loaned a lot more than any of those countries.

Emerging nations have also argued that the IMF went easy on Greece. At a time when the IMF faces growing competition China is setting up multilateral bodies' all over the place it's not a good time for the institution to end up with egg all over its face.

So don't expect it to go easy on the Greeks.

That said, tomorrow isn't the be all and end all' deadline, any more than any of the others have been. Just because a country misses its payment deadline doesn't mean it's instantly in default. It gets at least a month's grace, and then another three months after that.

So this extend and pretend' patching can keep on going, until finally the Greeks or the Germans get bored with it all.

The real reason to worry about a Greek exit

But this Hotel California' (once you're in, you can never leave) vision of the eurozone is very much a Europhile construct the fear that any signs of reversal in the Grand Projet will see the whole edifice collapse beneath the weight of its own contradictions.

In reality, it's hard to see anyone else lining up to leave. In the medium term, Grexit' might well help Greece. The new drachma would collapse, and Greece would escape its debts the way it did in the old days through inflation and default. Tourists would flock in, as long as there remained a reasonable level of social stability.

But that's a painful process. Most other European economies don't want to rejoin the basket case' league of nations. The euro offers that badge of respectability, quite apart from anything else.

I suspect that the real reason Germany is scared of a Grexit' is that an exit by Greece would give more leverage to difficult' nations such as Spain, Italy and France.

Greece leaving is one thing Europe can cope with that (if it can't, then it's the worst case of poor disaster planning I'll have seen in a long while). But if it walks out, there's then a lot of pressure on the European Central Bank to make sure that the remaining countries are funded with printed money. That would take the pressure off them to reform their economies.

In short, Greece is going to be in the headlines for a long time to come. A rapid, clean, cathartic solution might be nice but don't bet on it.

Brexit may have unintended outcomes but so might a status quo vote

This is a bit of a reminder to Britain too. The thing about Europe is that if you're not digging your heels in against further integration, then you're giving the greenlight for it to go ahead. There isn't a middle ground.

So this EU referendum of ours is going to open whole cans of worms that few people seem to have discussed yet. A no' vote and Brexit' is one the one that the pundits are yelping about in the aftermath of the Conservative win.

But if we vote for the status quo rather than Brexit, is that what we're really voting for? Or will someone one day in the future wave a status quo' vote in our faces and say: "You said you were happy with further integration so we don't need to consult you now that we're joining the euro."

It'll be a very big issue indeed. But one for another morning I think.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.