Greece edges closer to defaulting on IMF debt

Greece has to repay another tranche to the International Monetary Fund (IMF) on Friday, worth 300 million euros ($382.2 million) and there are signs it may not be able to make it.

The markets are still too sanguine on Greece despite the fact that negotiations with eurozone creditors and the IMF have not progressed because of sticking points such as pension cuts and the government’s insistence of awarding the so-called 13th pension, especially to those on low pensions.

Analysts at RBS say that unless a compromise is reached soon, Greece will have to miss at least one payment to the IMF in June.

If that happens, the Greek government is likely to enter a two-month grace period during which capital controls could be implemented to prevent bank deposit flight, with deposits in Greek banks having already fallen to a 10-year low.

“But this does not automatically mean a euro exit — that would require an active political decision, not just the chances of a missed payment,” say the RBS analysts.

They note that public opinion in Greece has shifted towards allowing for more austerity if the government cannot reach a compromise with the external creditors.

Greeks would prefer to stay in the eurozone even if it means austerity. Source: RBS

Greeks would prefer to stay in the eurozone even if it means austerity. Source: RBS

The RBS analysts view the probability that Greece would leave the eurozone as low, but say that volatility and the chances of a missed payment could increase.

Capital Economics analyst Kevin Ferriter is much more sceptical, and thinks the fact that the spreads of eurozone periphery bonds versus the safer German bunds are not higher is surprising.

“Spreads have presumably been contained as a result of four beliefs, each of which may be mistaken,” he wrote in recent research.

The four mistaken beliefs about Greece right now, which support the bond yield spreads in the eurozone at “surprisingly” tight levels in Ferriter’s view, are:

  • A deal can be reached between Greece and its debtors;
  • A default does not mean that Greece must exit the eurozone;
  • The ECB has backstops in place that are intended to prevent contagion;
  • If Greece does leave the eurozone, it doesn’t mean others will follow.

Ferriter believes investors are being complacent about the risks that Greece poses, stressing that even if a deal is reached now, the current talks only involve releasing the final tranche of the existing bailout, which was negotiated by the government before Syriza’s ascension to power.

“We have not even got to the issue of the third bailout yet. Given how fractious the current talks have been, we envisage that further negotiations would reach an impasse,” he warned.