If there were ever a time for Greece to default on its loans, it’s now. With money running out to cover public sector wages and pensions and the IMF warning that a bailout extension would not be granted, Greek banks may soon find themselves implementing EU-inspired contingency plans.
Talks between Greece and its Eurozone partners were cancelled on Tuesday for undisclosed reasons, according to a Greek senior official. Very little progress has been made since the European Union granted Greece a four-month extension now set to expire in June. While talks have resumed, no bailout payments were made, as Greece’s “red lines” prevented tangible breakthroughs at the negotiating table.
Eurozone officials confirmed on Tuesday that no breakthrough has been made in recent negotiations, ruling out the possibility of a deal by Thursday. These officials also criticized the Syriza regime of not tabling credible economic reforms related to the VAT tax. Greek officials last week were optimistic that an agreement would be reached sooner rather than later.
Many will argue that a default was inevitable once Greece’s far-left Syriza party entered the fold in January. Syriza’s rhetoric, which included everything from threatening to reintroduce the drachma, holding public referendums and demanding Second World War reparations from Germany, certainly hasn’t bolstered Syriza’s credibility. In fact, it has provoked the ire of European officials who are increasingly emboldened by the notion that a Greek default and eventual exit from the Eurozone would not be the end of the world. In fact, it may even promote the Eurozone’s financial stability in the long-run.
At the centre of the controversy has been Greek finance minister Yanis Varoufakis, who in the eyes of European Commission president Jean-Claude Juncker, has become a hindrance to the negotiations.
“He is not helping the process,” Juncker said of Varoufakis, as reported by Greek newspaper Ta Nea.
“Mr Varoufakis is the finance minister of a country that has to confront huge problems and he doesn’t give the feeling that he knows that,” Juncker added.
Greek Prime Minister Alexis Tsipras removed the combative finance minster as chief negotiator following pressure from the troika.
Odds of Default Grow
Several analysts, like Mohamad al-Erian of Allianz, believe the odds are in favour of a Greek default. This financial “accident” could pave the way for an eventual exit from the Eurozone.
Others like Matt Sherwood, head of investment research at Perpetual, described the Greek debt problem as a “zombie you just can’t kill,” according to the Australian Broadcasting Corporation.
He added, “If they were ever going to default in the last four years, now would be the time.”
While Greek and German officials have played down the prospect of a default, the Germans are already talking about introducing a parallel currency to cover public pensions and salaries. This would theoretically keep Greece in the Eurozone by creating an IOU system allowing Athens to preserve euros for payments.
Other economists are optimistic that a last-minute deal to preserve Greece’s integrity would be reached. On Monday the French bank Societe Generale said the chances of a Greek default is at 40 percent. They warned that missing interest payments to the European Central Bank, which are also due in June, would be riskier than missing payments to the IMF, since the ECB is providing Greece with emergency liquidity assistance (ELA). Without the ELA, Greece would be forced to leave the euro.