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.

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.

Recommended

How the Covid-19 vaccine crisis is putting the EU in danger
EU Economy

How the Covid-19 vaccine crisis is putting the EU in danger

The botched coronavirus vaccine campaign will cause long-term harm to the EU's economy, says Matthew Lynn.
4 Apr 2021
How the vaccine wars will harm us all
Global Economy

How the vaccine wars will harm us all

Grabbing and hoarding vaccine supplies, or even manufacturing one’s own, might seem to make sense for a state in an emergency. But the damage done to …
27 Mar 2021
The European Central Bank fumbles its way towards yield curve control
EU Economy

The European Central Bank fumbles its way towards yield curve control

The EU’s economic recovery is faltering, but its bond yields keep rising. That makes things tricky for the European Central Bank, says John Stepek. He…
12 Mar 2021
Vexing vaccine delays hit drug firms
Biotech stocks

Vexing vaccine delays hit drug firms

AstraZeneca and Pfizer are being attacked by the EU over what it claims are delays in delivering the Covid vaccine.
28 Jan 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
What does the Coinbase listing mean for bitcoin and other cryptocurrencies?
Bitcoin

What does the Coinbase listing mean for bitcoin and other cryptocurrencies?

As the bitcoin price hit new highs, the world's biggest cryptocurrency exchange, Coinbase, listed on the stockmarket. John Stepek looks at what that m…
15 Apr 2021
Lab-grown meat: the new agricultural revolution
Soft commodities

Lab-grown meat: the new agricultural revolution

Vegan alternatives are taking off, but the future of food technology lies in lab-grown meat – cultivating steaks and burgers from animal cells, says A…
16 Apr 2021