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

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
Interest-rate rises mean more pain for stocks
Stockmarkets

Interest-rate rises mean more pain for stocks

Interest rates are rising around the world as central banks try to get inflation under control. That’s hitting stockmarkets – and there is more pain t…
13 May 2022
Why Elon Musk's Twitter takeover could mark the end of the reign of the CEO
Stockmarkets

Why Elon Musk's Twitter takeover could mark the end of the reign of the CEO

The overlords of the corporate world have had their day, says Matthew Lynn. Long live the Technokings!
8 May 2022
Britain’s post-Brexit trade chaos
UK Economy

Britain’s post-Brexit trade chaos

The government has yet again postponed introducing post-Brexit checks on EU imports. Why has it done this, and does it matter?
7 May 2022

Most Popular

High inflation will fade – here’s why
Inflation

High inflation will fade – here’s why

Many people expect high inflation to persist for a long time. But that might not be true, says Max King. Inflation may fall faster than expected – and…
13 May 2022
Cryptocurrencies are crashing – so how low will bitcoin go?
Bitcoin & crypto

Cryptocurrencies are crashing – so how low will bitcoin go?

The entire cryptocurrency sector is crashing, with bitcoin now well below $30,000. This is big, says Dominic Frisby. So just how low could bitcoin go?
12 May 2022
What the Ukraine crisis might mean for ESG investing
Advertisement Feature

What the Ukraine crisis might mean for ESG investing

The Ukraine crisis has brought many of the issues around ESG investing into sharper focus. Where does the sector go from here?
3 May 2022