As the latest episode of the soap opera, which is Greece, continues to unfold, many start to question the vexing question of when a default is likely to occur. The reality is that a default is already unfolding within Greece…a domestic one.
The BBC broke the news yesterday that Greek payments to pensioners were delayed for a few hours due to a ‘technical’ glitch, which in my opinion, is likely to have been the administration scrambling to move the funds into place. It was likely a scary few moments as pensioners milled around their ATM’s waiting upon their meagre allowance. The other shoe to fall is the fact that many public employees also face salary shortfalls with some reporting salary payment having been up to a month in arrears.
Despite Greece managing to avoid any external defaults and keep up with their repayments to date, the reality is they are already out of money. Individuals and Companies dealing with the Greek state view them as a very real credit risk, as payment delays are now the norm. Companies across the spectrum, including military suppliers, are warning that they will need to start suspending supply if payments do not start to flow from the embattled government.
Despite the Greek Government referring to the pension payment and other delays as “technical” issues, it is clear that the economy is close to running dry domestically. Greece’s attempt to raid the accounts of local municipal bodies, which was resisted, is clear evidence that a cash crunch is in place. Considering that Greece has received no external funding from the IMF since August of 2014, it appears that they have finally reached the point where an actual default is in full swing, a domestic one.
So what next for the intrepid Greeks? The conventional wisdom suggests that, as the IMF repayment looms, a deal will be struck with the Eurozone for additional bail-out funds. Unfortunately, time is running incredibly short and the impetus rests with Greece to accept concessions. Considering the hard line mandate of Syriza, concessions towards further austerity are unlikely.
The reality is that over the past month, the ECB has sought to protect their position and limit any potential for the spreading of contagion if a Greek exit should occur. The ECB’s exposure is approximately €110billion, to banks within its system, and €20 billion that has already been spent in shoring up the Greek economy. Although the sum is large, the ECB and its member states have started to accept that a Greek default is a very real possibility and potentially palatable.
Despite their desire to stay within the Eurozone, Greece is in a position where they must make real concessions to secure a deal. Political posturing aside, the time is now for an agreement because a IMF default is likely to cause capital flight and the ECB may not be so inclined to allow unfettered access to the ELA fund. This is especially prescient if Greece is ultimately going to exit anyway.
Ultimately, failure to secure a deal to cover the IMF repayment next week could very well cause a sudden Greek exit as deposit outflows explode collapsing the Greek banking system.