Greece’s last-best chance for a deal begins on Thursday, as finance ministers from across the eurozone gather for the latest Eurogroup summit.
According to analysts at French investment bank BNP Paribas, Greece is “staring down the barrel at default.”
Greece is trying to unlock its last bailout tranche, arranged under the previous government. Accessing the €7.2 billion (£5.18 billion, $US8.10 billion) package will give Greece the cash it needs to make the most immediate debt payments.
But the new radical government is refusing many of the austerity measures and reforms attached to the funding. According to Greek newspaper Kathimerini, the squeeze on the public finances is getting worse — Greek tax revenues were €1.7 billion lower than forecast between January and May.
In a note out late Tuesday, BNP Paribas explain why Thursday’s Eurogroup meeting is Greece’s last real chance for a deal:
Previous self-imposed deadlines have passed with no great effect. This time is different, however. Greece’s already extended bailout programme expires in two weeks, so any potential agreement would have to be signed off by various national European parliaments by then. Failure to strike a deal would leave Greece with insufficient funds to make a EUR 1.6bn payment due to the IMF in around two weeks’ time. Default would probably force the ECB to halt any financing to Greek banks via its Emergency Liquidity Assistance programme, requiring the imposition of capital controls in Greece and limits on domestic bank withdrawals.
The chances of a deal Thursday aren’t looking good — on Tuesday Greek Prime Minister Alexis Tsipras attacked the International Monetary Fund (IMF), which he said was “criminally responsible” for Greece’s situation. Both Greece’s creditors and the government insist they will be making no more significant concessions to reach a deal.
That Emergency Liquidity Assistance (ELA) is now of ultimate importance to Greece — it’s what’s keeping the country’s banks afloat. If the country defaults, it’s thought likely that the ECB will withdraw that assistance, leaving the financial system to deal with an avalanche of withdrawals unsupported.
Greece owes payments to the IMF on June 30, and analysts are split over whether missing these would constitute a default — the IMF does not take any formal action for non-payments until a month after the deadline elapses.
But Bank of America Merrill Lynch analysts confirmed in a note on Tuesday that they believe the ECB would probably have to pull the plug:
There is an uncertainty on whether or not Greece could benefit from a 30 day “grace period” if it misses the 30 June deadline. In our view, given the focus on this issue, it would be very hard for Christine Lagarde and the board to turn a blind eye.
If the ECB don’t act at that point, Athens has until July 20 at the very latest — at which point about €3.5 billion (£2.52 billion, $US3.94 billion) is due to be paid by Greece to the ECB itself. Missing that payment is something ECB chief Mario Draghi and the institution’s other board members couldn’t turn a blind eye to.
If Greece defaults, the country would almost certainly have to bring in capital controls to prevent money from flooding out of the country — and that could be Greece’s first step towards quitting the euro (Grexit).
The BNP Paribas analysts list just some of the potential consequences of Grexit — a recession wiping perhaps another 10% off Greek GDP, a private sector starved of funding, and explosive inflation.