Impending Grexit?

Greek Exit

(Source: Flickr)

We have seen this week some heated negotiations between Greece and its European lenders.

Here are some of the issues facing Greece at the moment:

  1. Technical default: Greece is due to repay €1.6bn (£1.2bn) to the IMF at the end of June. On Wednesday, Athens announced that it is stony broke and will not be able to pay up. As I understand it, this amounts to a technical default.
  2. Troika withholds money: The Troika (i.e. the European Commission, European Central Bank and the International Monetary Fund) are withholding the last tranche of money from Greece’s second bailout until Athens agrees to make a number of painful economic reforms.
  3. Political deadlock: Alexis Tsipras, Greece’s prime minister, came to power on an anti-austerity ticket in January and is refusing to accept calls from the Troika for new austerity measures.
  4. Emergency Liquidity Assistance in doubt: Emergency Liquidity Assistance (ELA) is support which the ECB has been providing to Greek banks as they suffer from dwindling deposits as worried Greek savers continue to pull money out of their accounts. As the name suggests, ELA was intended to be a temporary measure; will the ELA scheme be continued?
  5. Greek Exit?: If debt negotiations remain unresolved by the end of the month, Greece will default on its repayment obligations. If this happens, one possible scenario is that emergency liquidity assistance will come to an end, there will be a run on Greek banks as people scramble to withdraw their money, and the Greek government will impose capital controls to prevent money from leaving the country. Chaos is likely to ensue, and Greece may exit the currency union and the EU. Since the Greek economy is small in relative terms (around 1.4% of EU GDP), failure by the Troika to contain the Greek debt crisis may lead to reduced confidence in the European project and the spread of financial contagion to other highly indebted EU member countries.

Watch this space.

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