Greek Debt Deal: A Bridge To Far?

As Greece closes in on the point of no return, with no sign of a debt deal on the horizon, talk about an imminent default continues to grow. Monday saw the revelation that the embattled European country was so close to running out of funds that Prime Minister Alexis Tsipras advised the ECB that, without assistance,the €750 million payment to the IMF would be missed. The ECB responded to the request decisively…by not responding.

It appears clear that the ECB has drawn a hard line under the needed reforms for Greece to secure the additional tranche of bailout funds. Although Greece continues to bloviate during debt negotiations, the time has now come to put up or shut-up. If Greece fails to secure a deal within the next two weeks, the only course of action will be a default.

On the basis of the increased risk of an IMF default next month, Greek bond yields (2-Year) have surged over 250 basis points and are currently on offer with a yield of 23.68%. It would appear that the market views the risk of a Greek default as increasing.

This is despite the hollow statements of Greek Finance Minister Varoufakis, who today suggested that a deal between their European partners was very close. Obviously, this is a claim we have all heard before from members within the Greek administration, and in this case, a claim that is denied by their creditors.

Despite ongoing negotiations, the sticking points appear to revolve around reductions to Greek pensions and employee payments. Subsequently, the Greek anti-austerity party faces an impossible choice of either defaulting or rejecting their elected mandate. Subsequently, Germany has suggested that a referendum over austerity would be appropriate. However, any move to undertake a vote on the issue is likely to drag a decision out and be heavily politicized.

It would appear that Germany’s move to suggest a vote on the issue is designed to absolve them of any moral responsibility for the road ahead. The prevailing view is that a Greek default need not mean an exit from the Eurozone and could, in fact, remain a bargaining tool at the ECB’s disposal.

Any default would likely see the well run dry for pension and employee payments, forcing the Greek government into the position of negotiating in good faith over austerity, or face the harder pain of an immediate move back to the drachma. As an additional incentive, any default could likely see much tougher austerity measures imposed then is currently proposed.

Ultimately, what was a game of chess has now turned into a game chicken, with Greece driving a Prius and the ECB behind the wheel of a tank. Let’s hope cooler heads prevail and Greece finds a palatable deal at the 11th hour.