The past four months of negotiations between Greece, the International Monetary Fund (IMF) and the European Central Bank (ECB) have seen a number of self imposed deadlines come and go – the passage of the Luxembourg gathering today may appear to be the last straw as time is all but up for a deal to be struck, opening the door for a Greek default at month’s end.
With the cessation of talks today between creditors and Greece, as well as a lack of capitulation from Greek Prime Minister Alexis Tsipras, an IMF default of $1.7 billion at the end of the month is all but certain. Greece deferred its IMF debt payment and aggregated its June payments earlier this month, however without unlocked European aid, this figure looks to be untenable.
Recent indications have shown that Tspiras and the Syriza government are fully aware and prepared to deal with the consequences of what happens next – what that may be nobody truly knows for there is no current legal or historic precedent for expulsion from the Eurozone or European Union.
Cue the Capital Controls
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Without unlocking a bailout package of nearly $8.2 billion, Greece will have little choice but to waiver from capital controls over its domestic markets and banking structure. Like Iceland and Cyprus before it, capital controls will help mitigate a capital exodus out of Greece, despite banks already losing over 20% of their assets to such flight since last year.
Capital controls will likely place a daily cap on the withdrawal amounts on ATMs, along with limitations on money leaving the country. The capital limitations, while extremely unpopular, will likely prevent a catastrophic breakdown of liquidity as Greece scrambles to procure finances for pensioners and government salaries, both of which are slated for the end of the month.
Time has Expired
IMF Chief, Christine Lagarde has already reiterated that Greece will not be given any grace period or consolation should it ultimately fail provide the consolidated debt June payment by the end of the month. While miracles are possible and there are those that are still holding out hope for an eleventh hour deal, i.e. Chancellor Angela Merkel, the difficulty in approving measures and the legal lags likely to be dealt with realistically mean time has run out.
The resulting impasse is the product of months of back and forth negotiations that have provided little but volatility to markets and uncertainly in Greece. Greek Prime Minister Alexis Tsipras has championed ‘red lines’ and untouchable pensions in Greece, a major sticking point with creditors.
Both the lenders and Greece have agreed on a budget surplus that the country should target, however the means to achieve it has been hotly contested. The lenders want Greece to make savings on pensions equivalent to about $2.28 billion per year – Greece offered cuts of only $81 million, according to a recent Bloomberg statement.