Advertisement

Greece heads towards default

Now's the time for investors to seriously consider the risk of a Greek default and euro exit.

15-6-18-Tsipras-634
Alexis Tsipras: brilliant brinkmanship or ineptitude?

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.

Advertisement - Article continues below

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

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 GDPon 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.

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Boris Johnson’s big Brexit plan
Brexit

Boris Johnson’s big Brexit plan

The prime minister needs to get Brexit done, and get the economy growing – particularly for first-time Tory voters. Can he manage all that while negot…
15 Jun 2020
European assets bounce as the eurozone's economy turns upwards
European stockmarkets

European assets bounce as the eurozone's economy turns upwards

Both the euro and European stocks have rallied strongly in the last few days.
12 Jun 2020
Margrethe Vestager: a symbol of all that’s wrong with the EU
EU Economy

Margrethe Vestager: a symbol of all that’s wrong with the EU

Margrethe Vestager, the EU’s competition commissioner, wields enormous power over industry, and abuses it, says Matthew Lynn.
7 Jun 2020

Most Popular

Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?
UK Economy

Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?

John Stepek runs his eye over the chancellor's £30bn stimulus package and asks if it's enough to get the economy back on its feet after months of lock…
9 Jul 2020
An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
What gold, bonds and tech stocks have in common
Stockmarkets

What gold, bonds and tech stocks have in common

"Risk off" or "safe haven" assets such as gold and government bonds have been doing well lately. But so have riskier tech stocks. That seems to defy c…
10 Jul 2020