Experts have warned markets have become overly complacent about the risks and consequences of a Greek default as yet another crunch deadline looms.
The parlous state of the embattled eurozone nation’s finances is set to be the main topic of discussion at a eurogroup meeting of finance ministers today (May 11).
The country has been struggling to find the money needed to pay back its debts and could run out of money within a month without further support from creditors such as the International Monetary Fund (IMF) and the European Central Bank (ECB).
Experts have warned the prospect of a Greek default is more likely now than it was in 2012, and the repercussions could be more severe than the markets currently expect.
James Dowey, chief economist at Neptune, said although a ‘Grexit’ was not his base case, it was a “material risk in the way that it was not in 2012”.
Mr Dowey said the market has not factored in the risk – shown by the yield on a 10-year Greek government bond currently standing at around 11 per cent, compared with close to 30 per cent in 2012.
Anthony Willis, investment manager on the F&C multi-manager team, said the risk of a Greek default was “higher than we have seen for several years”.
But he said investors had become so used to the ECB and Greece dealing with the issue by “kicking the can down the road”, that the expectation was that the parties would find some way to muddle through.
The risks have been enhanced by what Mr Willis termed the “arrogance” of the Greek government, led by the Syriza party, which had “refused to compromise” on key issues.
But Mr Dowey said Syriza had both an electoral mandate to fight the austerity conditions put in place by the ECB and the IMF, and also “from an economic point of view it makes sense for them to default and leave the euro”.
Mr Dowey pointed out Greece was now running a current account surplus, as opposed to the huge deficit in 2012, so if it ignored its external debts it could easily pay its public sector workers.
Even if Greece does default, with most of its debt held by institutions such as the ECB rather than private sector banks, investors see little risk of contagion.
But Mr Dowey said this view was too “complacent” and was “underestimating the wider implications”.
He said: “The glue that holds the euro together is confidence that each country is committed to stay. Once one country leaves that confidence is lowered irrevocably.”
Mr Dowey said if Greece left the euro, market confidence “would be shaken” and government bond yields could start to rise.
And Mr Willis added that, as when Lehman Brothers was allowed to collapse during the crisis, sparking huge damage to companies and economies, “you do not know what all the consequences would be when you let Greece go”.
Meeting of European finance ministers expected to end in stalemate
Today’s meeting of eurogroup finance ministers is widely expected to end without an agreement in place for Greece.
The negotiations centre around a €7.2bn bailout package that Greece needs if it is to avoid running out of money within the next couple of months.
Greek finance minister Yanis Varoufakis’s hardline, uncompromising stance had led to fears that negotiations would break down, but Mr Varoufakis has been sidelined in recent weeks as Syriza leader Alexis Tsipras has sought to convey a more conciliatory attitude.
Neptune’s James Dowey said progress was now slowly being made towards an agreement, and the “chance of a successful outcome has risen somewhat” in the past few weeks.
Comments from other eurozone finance ministers last week suggest further progress is expected to be made today, but the likelihood is that the bailout agreement will once again only happen at the 11th hour.
