Default and a Grexit look much more likely after the IMF announced yesterday that it was walking away from talks with Greece, saying that no progress had been made on narrowing “major differences” between Athens’ and its position. The Wall Street Journal reports:
With its announcement, the IMF put an official halt to negotiations over details of the bailout between Greece and the institutions overseeing the program, which also include the European Commission and the European Central Bank. Those talks had been on pause for a few days already. But making the break public significantly heightens pressure on the government in Athens to sign on to unpopular policy overhauls and spending cuts, or risk a default on its debt and even greater financial chaos.If the IMF were to drop out of the Greek bailout entirely, it would severely complicate European efforts to keep the country in the eurozone and raise questions about the credibility and sustainability of a bailout program. Parliaments in Germany and other hawkish eurozone countries have made IMF involvement a precondition for approving any assistance for Athens.Analysts say that the ECB, which Greece depends upon to authorize emergency funds to cushion growing deposit outflows from its banks, would also balk at any deal without the IMF’s involvement.
In the wake of the news, investors fled from Greek debt this morning, sending yields soaring, and shares of Greek banks were pummeled, as a crisis that has heretofore seemed only remotely possible took on a new and frightening reality. “It once again seems that a Greek default is practically inevitable at this point,” an analyst at London Capital Group said. “The next 24-72 hours will be crucial as we enter potentially uncharted territory for the eurozone.”A German tabloid reported that German Chancellor Angela Merkel’s team was drawing up serious contingency plans anticipating a Greek default. Capital controls for Greek banking clients and a debt cut are on the agenda. This planning got underway as a new poll was released revealing that 51 percent of Germans think Greece should not remain in the Eurozone, compared to 41 percent who think they should. The poll also indicated that most Germans (70 percent) think no further concessions should be made to Greece.We’ve noted since the beginning of this crisis that the narrative was not as simple as prodigal southerners and exasperated northerners: both sides bear responsibility for piling a debt burden on Greece that was unsustainable, and in theory both had incentives, both moral and practical, to work toward an equitable solution. But it’s likely none of that matters now. Greece’s Syriza government looks to have badly overplayed its hand following its election in January, and with seemingly every step since has made matters even worse for itself.Because the European creditors, for their part, have been in the habit of issuing dire, unfulfilled warnings throughout the negotiations, we’ve noted that the Greek government may not have been able to gauge when the creditors finally meant what they said. That now appears to have happened.There is a moment in Greek tragedy, called anagnorisis, where the hero, having pushed past the point of no return due to his own hubris, realizes in a moment of horror the full scope of his folly and the disaster to come. If the Greeks are lucky, something like that might be going on in Athens right now. The eurocrats have stopped talking (usually a reliable sign of the apocalypse), but there’s still a way for Greece to come back to the table. Unfortunately, it would require something a lot closer to capitulation than a truly negotiated compromise at this point.For a number of reasons, though, that might not happen. (And initial signs do not look promising.) Bunker mentality can be a strong force during a crisis—there’s a reason why a government in peril (or the hero in Greek tragedy) is often the last to realize what’s going on. Furthermore, woven deeply into Syriza’s hard-left DNA is a series of impulses that might welcome a final split, either on monetary grounds or for the larger chance to build a Bolivarian-style socialist experiment on the Aegean.One thing is now certain: the creditors have finally made their position about as clear as possible. This decision would seem to mark a turning point: either the negotiations will end outright, with all the accompanying uncertainties everyone has spent years trying to avoid, or they will become something much more like an ultimatum. How Athens handles its moment of anagnorisis will determine what comes next.