There was some mild relief on Thursday when Greece made its latest payment to the International Monetary Fund, with bond yields sliding. (Yield measures risk, so when they decline it suggests there’s less risk of a default.)
That sort of reaction is a bit like having a celebratory drink because you’ve paid your electricity bill — it’s probably not a good signal about your financial health.
Greece is currently negotiating a short-term bailout extension that it doesn’t really want, offered by European institutions which don’t trust the Greek government and approved by other governments that are running out of patience. That’s the bottom line. Athens currently has until about April 15 to present a completed reform list to its creditors.
But even if Greece gets the bailout deal when European finance ministers meet on April 24 (which isn’t assured), we’ll be back in the same place in about two months. Then, the government isn’t going to want another extension. It’s going to want the major debt deal it promised to deliver when it won the election. If it does go back to the cycle of renewing bailouts, it’s going to have problems with its own supporters and politicians.
Here’s Dr. James Nixon, chief European economist at Oxford Economics, talking about one of Greek PM Alexis Tsipras’ most recent speeches:
In remarks that must clearly put Greece on a collision course with its international lenders, he said that Greece had no interest in a third bailout or receiving more loans. What Greece wants he said, is a new contract for growth not another memorandum laden with austerity and argued that Greece’s official creditors had committed to start debt relief talks in June…
We see a small probability that a deal could be struck with the Europeans that might involve the ECB agreeing to rollover some of the bonds it currently holds. But in order to be time consistent, that surely implies that Greece give up all talk of debt relief — otherwise there is very little incentive for anyone to lend Greece more money. In short, unless a compromise can be found, the risks of a Greek exit become more likely, as more time slips away.
One reason that a compromise is less likely than it was in the past is that politicians and financiers in Europe are far less scared of Greek contagion than they were three or four years ago. Back in the worst days of the euro crisis, it was feared that banking and sovereign default in Greece would spread to other southern European countries, causing a domino effect.
But these days, bonds in Portugal, Spain and Italy barely seem to react at all to bad news in Greece, so there seems to be much less of an existential threat to the bloc.
And without that contagion, the rest of Europe might be able to shrug off a Greek exit. The chart to the right, also from Oxford Economics, suggests that it would barely dent growth for the eurozone.
As far as we can tell, these are the three potential “good” scenarios.
- Greece extends its current bailout again later this year. This would be the solution preferred the the Eurogroup, would almost certainly cause an internal Syriza revolt and potentially trigger new Greek elections, or even referendums on the bailout.
- Europe gives Greece a debt haircut. This would be a deal favouring Syriza, but it’s not clear why most European finance ministries would agree to it — there’s no indication that they’d put up with this.
- Some sort of halfway deal. This seems to be what many people are hoping will happen, but it could really be the worst of both worlds, prompting revolts among centre-right governing parties in the rest of Europe and Syriza’s left.
The chance of any of these scenarios coming to pass seems unlikely, but you can make your own judgement. The alternatives left are some version of government and bank default, capital controls and potentially a messy Grexit (Greek exit from the eurozone). Investment bank UBS now reckons that a Greek default is more likely than not.
A big deal on debt is actually a good idea, even if Germany doesn’t want it. Greece’s far-left government is correct about the country’s debt burden — it’s completely unsustainable under the current plans. But taxpayers in the rest of the continent don’t agree and aren’t likely to put up with further attempts to restructure the debt. This is an immovable object meeting an irresistible force.
In the absolute best case scenario, Greece is about to get some relief for a few months. After that, Athens, Frankfurt and Brussels go back to the brutal negotiations currently underway, but with more tension and even less to agree on.
So don’t get your hopes up.