Positions harden in Europe
Next 10 days will be crucial if ‘Grexit’ is to be avoided
There are an increasing number of indicators that the coming week to 10 days will be crucial for the negotiations between an embattled Greece and its creditors. On June 18, the finance ministers of the euro zone are due to meet. If a deal on releasing ^7.2 billion of bailout aid is not reached before then, Greece will likely have to default on payments to the International Monetary Fund (IMF) totalling ^1.5 billion and on two tranches of borrowing, worth ^6.7 billion, from the European Central Bank (ECB).
While it appeared until relatively recently that talks were on track to have the bailout aid released, they ran into a sequence of major roadblocks last week. The government in Athens declared that it would not pay ^300 million to the IMF as scheduled. This was not a default, since the IMF rules permit the bundling of a month’s repayments to be made at the end of that month. But this bundling technique has not been used since the 1980s and, unsurprisingly, markets were shocked — Greek stocks suffered their biggest one-day drop since the Syriza, a leftwing anti-austerity party, was elected to power months ago. Then, in another jolt, Greece’s prime minister, Alexis Tsipras, delivered a belligerent speech to the country’s parliament attacking the European Commission’s bailout proposal as “absurd” and “irrational” and a “bad negotiating trick”. The differences between the proposed road maps from Athens and Brussels remain vast — but the creditors are presenting a more determined and united front than before, which spooked Mr Tsipras’s Syriza members of Parliament. In essence, while the European creditors, the IMF and the ECB, want Greece to reform pension entitlements and labour markets first, Greece wants some form of official debt relief to be decided on first. The differences have not been significantly bridged as yet.
In effect – surprising many observers, who expected the opposite to happen – both the Syriza and the European creditors have hardened their positions. Mr Tsipras’s speech in Parliament offended even the head of the European Commission, Jean-Claude Juncker, seen as one of the most sympathetic in north Europe to Greece’s position. Meanwhile, although the Syriza remains nominally pro-euro membership, many observers suspect that the membership now comes much further down the party’s priority list than does, for example, avoiding painful structural reform. This hardening of positions, thus, inevitably suggests that “Grexit” is far more likely now than it has been for months. The consequences for financial markets, of course, will be profound. The second half of 2015 will likely see more financial uncertainty than the first.