Fears Greece will Default as Borrowing Cost Rises

There are growing fears for Greece as it resorts to extreme measures to stay afloat. Many are concerned that it will default on its repayments, as the bail-out drama continues.

Finance minister Yanis Varoufakis met with President Obama to discuss measures to avoid bankruptcy. Suggestions of raiding the pension funds to keep the country afloat have been voiced, following the rebuffing by the International Monetary Fund (IMF) of a request to delay loan repayments.

Head of the IMF, Christine Lagarde recently said “We have never had an advanced economy asking for payment delays”, continuing to explain the delaying of the repayments is “not a course of action that would actually fit or be recommendable in the current situation”.

The Greek deputy finance minister has suggested that state-owned enterprises may need to transfer their cash balances to assist the struggling economy. The debtor nation faces a bill of 2.5billion, and having not received any emergency cash since August 2014.

This desperate situation does not necessarily mean Greece would leave the euro. A likely measure is the restriction of export of capital from the country in order to conserve as much cash as possible. Following the example of Cyprus could save Greece for a few more months. Robert Peston suggests that Greece could create a “sort of parallel domestic currency which is interchangeable with euros”.

Whilst the Eurozone and the IMF can afford the losses on Greece’s debts, there may well be instability that affects us as we decide on the election result. The risk to our short-term prosperity is lower than the situation of five years ago, however the long-term risks could be more problematic if Europe fails to work together and the conditions for growth and prosperity are sub-optimal.

It is being reported the negotiations with Greece are beginning to increase in momentum, but many remain doubtful financial security will be reached quickly. The finance minister has since explained that Athens will “not rule out a referendum or early polls if the talks reach an impasse”.

The IMF has expressed concern that long-term risks need to be minimised, as a Greek exit would not be without problems, and the EU should not be considered a “club” that can be joint and left as each state decides.  

As the situation continues and the payment dates are missed, it becomes clear that a Greek exit, or so-called ‘Grexit’, could be a real issue for Europe, which would be felt across the global economy. The consequences for Greece will be damaging regardless of the ultimate outcome, but it is now paramount that other Eurozone countries and the IMF support Greece so confidence can be re-established.