Critical turn for ailing Greece

Athens only just managed to make its April repayment of €458 million and UK markets are braced for a crunch as Greece must next month pay pensions and public sector salaries, or repay debts.

A default would instantly result in Greece’s exit from European monetary union but would set a dangerous precedent that would encourage other far-left political movements across the euro zone. Kostas Tsironis / Bloomberg
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LONDON // Like a virus that refuses to go away, the Greek crisis lingers on and is likely to do so for many months to come.

Investors in London, however, appear to be treating the events in Athens as something of a sideshow. That may be because many market participants in London have already made up their minds that Greece’s exit from the euro is inevitable.

Neil Woodford, a star fund manager who launched his own investment company last year, says: “There has been little progress in the euro zone’s most acute and immediate problem — that of Greece. There remains no obvious way of reconciling the end to austerity for which Greece’s electorate voted and the attitudes of its creditors.”

Athens might just have managed to meet a €458 million (Dh1.79 billion) debt repayment to the IMF, but every month into the foreseeable future, similar repayments are looming.

Another €950m, for instance, is due in May. It is no exaggeration to say that the Greek government, before the summer, is likely to have to choose between repaying its creditors or paying pensions to the elderly and salaries to the public sector.

A fresh indication of the dire straits in which Greece finds itself came on Monday, when the central government decreed that all public agencies, including local governments, must transfer their cash reserves to the central bank. The move could raise about €2bn to help Athens meet its payments.

Simon French, an economist at the stockbroker Panmure Gordon, says that it is the pension and payroll payments that are most likely to trigger a crisis.

“When push comes to shove, the international creditors will provide bridging assurance, but this is the key deadline,” he says.

“At the end of the day they are going to leave the euro zone. That is not up for debate. [German] finance minister Wolfgang Schäuble is trying to engineer a situation that is so unpalatable that they will leave themselves.”

Athens appears not to have given up hope that the IMF will relent on the payment schedule that Greece faces — even though Christine Lagarde, the IMF’s managing director, pointed out last week that her organisation had not once in 30 years allowed a sovereign creditor to alter a payment schedule.

However, the sell-off of bonds continued yesterday morning for the seventh straight session in a row, with Greece’s two and three-year bond yields now heading to 30 per cent, levels last reached in 2012. Greek bond yields on 10-year money pushed up to 13.61 per cent.

The last time the Bank of England governor Mark Carney talked about Greece, at the end of January, he said that the country represented less than 1 per cent of the total capital buffers held by Britain’s biggest banks.

That means the potential for contagion in British banks is low. “It’s much more of an idiosyncratic situation as opposed to a systemic situation,” Mr Carney said. “It’s important for Greece, and it’s important to get this right, but we should keep it in perspective.

“The exposure of banks, certainly the exposure of banks in the UK to Greece is very modest. … And, very importantly, there are many more tools to address any potential financial market spillovers from Greece, if there were to be any.”

Mr French says the bigger worry might be the political fallout in countries such as Italy, Spain, Portugal and Ireland. A Greek exit, particularly if it is followed by a successful devaluation, could encourage euro-sceptics in those countries.

Stefan Isaacs, who runs London-based M&G Investments’ European Corporate Bond Fund and has rid his fund of any exposure to Greek corporate debt, is rather less convinced of an eventual exit by Greece.

Nevertheless he remains concerned about contagion from a possible Greek default, particularly in Portugal. “The best outcome for risk assets — stock markets globally and bond yields — would be some kind of compromise with Greece and a renegotiation of the debt, so that they remain within the euro. But the nuclear option of trying to become more competitive by repaying in a new currency would be negative and taken poorly by markets and government bonds in the periphery countries,” he says.

One of the UK’s leading commentators on Greece, the economist Vicky Pryce, said last week: “If Greece manages to get through this nightmarish phase, a restructuring of the remaining debt must become a priority.” The chief economic adviser at the Centre for Economic and Business Research, she added that the visit of the financial minister Yanis Varoufakis to Washington last week, looked “like an act of desperation”.

In the meantime, the Greek prime minister Alexis Tsipras has also been paying visits, including a trip on April 8 to Moscow, where he was hosted by Vladimir Putin. The pair were obliged to deny rumours that Russia had offered Greece a financial lifeline or that Athens had offered Russia some kind of deal involving a gas pipeline to criss-cross Greek territory in return. However, a point was made to the EU nonetheless: push us too hard and you will drive us into Mr Putin’s arms.

Members of the euro zone, though, will be in no mood to soften its stance towards Greece. Sunday’s general election in Finland, one of the most strident opponents to handing more money to the Greeks or softening repayment terms, has returned Juha Sipilä, the businessman who leads the Centre Party, to the prime minister’s office, defeating the pro-EU Alexander Stubb.

It looks likely that Mr Sipilä will have to form a coalition with the Finns Party, which has been vocal in its opposition to Greece and the euro.

Had Greece been allowed to default on what it owes the European Central Bank, Finland’s share of the debt — as one of the suppliers of capital to the ECB — would have been about €2bn. That may not seem much, in the context of Greece’s overall debts to the outside world of more than €330bn, but set in the context of Finland’s population of just 5.4 million, it is a meaningful figure.

Last week the Greek government denied reports that it had been looking into the procedures involved in defaulting on its debts.

A default, of course, would instantly result in Greece’s exit from European monetary union and, while such a move would be welcomed by many across the euro zone — notably German voters, nearly seven in 10 of whom now favour ejecting Athens from the single currency — it would set a dangerous precedent that would encourage other far-left political movements across the euro zone, such as Podemos in Spain, that also seek to secede from the euro.

One thing looks certain, the original deadline for a debt agreement of Friday — when euro zone finance ministers will meet in Riga — is no longer the ultimate deadline.

Yet again, the can looks likely to be kicked further down the road, allowing time for the situation in Greece to get worse before it gets better.

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