Last updated: 10:13 / Wednesday, 10 June 2015
IHS Global Insight

Greece: Payment Delay Adds a New Layer of Uncertainty

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Greece: Payment Delay Adds a New Layer of Uncertainty
  • The delayed IMF repayment of Greece increases the likelihood of a default
  • Alexis Tsipras' government is in a difficult position. Greece's cash reserves are running thin and it will default without further official funds
  • Merkel currently benefits from increased room to manoeuvre through Greece due to the implosion of the German Eurosceptic party

The delayed IMF repayment of Greece increases the likelihood of a default, according to new analysis from Diego Iscaro, Senior Economist at IHS Global Insight.

The Greece payment delay adds a new layer of uncertainty to an already very uncertain situation. Alexis Tsipras' government is in a difficult position. Greece's cash reserves are running thin and it will default without further official funds. However, it is also fighting increasing opposition, particularly from the left of the Syriza party, to making significant concession to the creditors.

Tsipras will need some concessions by creditors on key items to win over critics in his own party: either by dropping requirements to increase VAT or by scrapping benefits for low pensions, together with some gesture in terms of debt relief.

“If creditors do not concede on either of these, then default risks would increase rapidly. However, this is unlikely as Greece's European counterparts are highly reluctant to see Greece default. Germany's chancellor Angela Merkel especially will push for a higher degree of leniency towards Greece than other EU members”, point out Iscaro.

Merkel currently benefits from increased room to manoeuvre through Greece due to the implosion of the German Eurosceptic party (Alternative für Deutschland: AfD). The AfD owed its existence and recent electoral successes to discontent in Germany over successive bailouts for Greece. However, for several months, the party has been experiencing infighting between a far-right anti-immigrant wing and a more liberal Eurosceptic wing. As a result, they pose a much-reduced threat to Merkel's Christian Democratic Union of Germany (Christlich Demokratische Union Deutschlands: CDU), which, in turn, gives Merkel more freedom to make concessions to Tsipras, analized the Senior Economist at IHS Global Insight.

“If creditors only offer minimal improvements, Tsipras is likely to negotiate for as long as he can, and then eventually accept what is offered; in this case, he would have to resort to support from other parties to approve such a deal in Parliament, as the left wing of Syriza would probably vote against it. Tsipras is likely try to engineer a national unity moment in Parliament to vote on the deal with creditors. A switch to a lasting coalition with centrist parties or a definite split within Syriza is unlikely, as party unity remains a high-priority goal for Tsipras”, said.

Elections would take at least 21 days to prepare

In case of only minimal concessions from creditors, the likelihood of early elections and a referendum on the deal would increase, as Syriza and Tsipras claim not to have a mandate to basically continue austerity as under previous governments, believes Iscaro. Calling elections would take at least 21 days to prepare, so the window to hold polls before the end of June (in order to vote and still be able to avert default) is closing fast: either it takes place over the next four days or it is no longer possible.

In any case, said Iscaro, time to reach a deal is running out. Although the next "hard" deadline is the end of June, when the IMF loans will have to be paid, both parties will have to reach an agreement before that date, as a deal will have to be approved by several Eurozone parliaments.

“As long as Greece and its creditors continue to negotiate, IHS does not expect the ECB to cut liquidity assistance to Greek banks, currently given via emergency liquidity assistance (ELA), as a result of yesterday's decision. However, the ECB is likely to stop its support if Greece enters a default or if hopes of a deal completely disappear. Under that scenario, the Greek economy would suffer from a significant credit crunch, increasing the probability of capital controls and, eventually, an exit from the Eurozone”, concluded.

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