Greece in danger of default

Greece and its lenders are in a difficult standoff with failure to agree could mean financial trouble all around the world.

Greece in danger of default

World Bulletin / News Desk

 In the battle over a bailout for Greece, neither the creditors nor the Greek government seem willing to concede.

But a failure to agree could have consequences not just for Greece, or Europe, but for the entire world economy, international economists told Anadolu Agency on Friday.

Greece must make a total of €1.5 billion ($1.63 billion) in loan repayment to the International Monetary Fund in June – the first one of €300 million is due on June 5. Then the country must come up with €2 billion ($2.2 billion) on June 12 to cover short-term Treasury bills, and another €1.9 billion ($2.1 billion) for more T-bills on June 19.

“Time is running out fast for Greece, in tandem with the state’s dwindling cash reserves,” commented Konstantinos Venetis, an economist with Lombard Street Research in London. The country is almost entirely dependent on emergency loans from the European Central Bank to keep its banks and public services running, and the banking system is under severe strain as deposits flow out elsewhere, Venetis pointed out.

But creditors are insisting that Greece completes a long list of belt-tightening economic reforms, and the SYRIZA government, elected on putting an end to austerity, just refuses to accept. While Greek Prime Minister Alexis Tsipras said on Tuesday that “an agreement would be completed soon,” the EU didn’t agree, announcing on the same day that “a staff-level agreement was being worked on.”

“It’s a standoff,” warned Christopher Dembik, an economist with Saxo Bank in Paris, “and one that could be dangerous for Greece, for Europe as well as for the global economy.”

Dangers of default

Dembik pointed out that Greece is close to running out of money, and, unless there is an agreement with the creditors, will not have access to the next tranche of €7.2 billion ($7.8 billion) in bailout funds.

“Greece needs a bailout agreement badly, but, for political reasons, is having trouble accepting creditors’ conditions on reducing public spending,” Dembik said. “The government may not realize how extensive the consequences of a default could be.”

One issue that would have to be addressed is the status of Greece’s Target 2 loans from the ECB. Greece has close to $50 billion in these liabilities, which come from fund transfers to other European central banks. Were Greece not to honor these debts, the European system would face serious stress, as other countries profited by the example.

But the euro system itself could be damaged by Greek default, as John Simister, an economics professor at the University of Manchester, explained.

“A default would reduce people’s trust in the euro as a currency,” Simister said. “I think it would cause long-term damage to the whole Euro-zone, and all of EU.  Argentina's defaults (e.g. in 2001) are still causing chaos, as some corporations who lost money demand payments (e.g. withholding Argentine ships).”

But a default could also deliver a nasty shock to the global economy, said Allan von Mehren, an economist with Danske Bank in Copenhagen.

“The loss of confidence in the EU and the euro could reverberate right through stock exchanges and finance all around the globe,” von Mehren said.

Worse still, a Greek default will mean that Germany will need to finance the economic recovery of Greece, Demik said. “Recovering from a Greek default will mean that financing will have to come from a number of EU nations, but with Germany taking the lead. This is not likely to be politically popular in Germany,” Demik said.

Güncelleme Tarihi: 29 Mayıs 2015, 12:43