Tuesday, June 2, 2015

Greece may need to default to break impasse, says Goldman

By Szu Ping Chan 01 June 2015

Goldman Sachs says a Greek default "may be necessary" to break the current impasse in negotiations

Angela Merkel, the German Chancellor, talks to Alexis Tsipras, Greece's prime minister. Photo: AFP

Greece may need to default on its debt in order to break the deadlock between Athens and its creditors, according to Goldman Sachs, as the country scrambles to make €1.6bn (£1.15bn) of debt repayments this month.

Huw Pill, Goldman's chief European economist, warned that Greece could not "have their cake and eat it", with Greek citizens ultimately facing the "hard choice" of a euro exit or continuation of severe austerity if it wanted to remain part of the single currency.

Mr Pill said in a note on Monday that the cash-strapped government was running out of funds to pay creditors and its civil servants. The country must pay back €304m to the International Monetary Fund on June 5.

"With liquidity slowly draining from Greece, missed payments on external obligations are possible or even likely," he said. "In such circumstances, the Greek sovereign will sooner or later (and probably sooner) enter technical default.

"Not only is it possible that we may need to see sovereign technical default and/or blocked Greek bank deposits in order to come to an accommodation between Greece and its official creditors, it may be necessary to do so in order to break the current impasse in negotiations."

While a deal between Greece and its creditors is still Goldman's "base case" scenario, Mr Pill said the current Greek government did not have a mandate to pull Greece out of the single currency bloc.

"The Greek government was elected on a platform that promised continued membership of the euro area but without the austerity, adjustment and oversight that came with the troika programme. Departing from this position requires a change in the political mandate on which the Greek government operates.

"Facing this reality, a new political mandate ­­ and thus a new government, a referendum or new elections ­­ will be required in Greece."

Alexis Tsipras, Greece's prime minister, has accused its creditors of issuing "absurd demands" in a clear sign that his government would not give in to pressure from its creditors to slash pensions.

It came as Michael Fuchs, the deputy chairman of Angela Merkel's CDU/CSU parliamentary group in Germany, said it was unacceptable for for Greece to blame the EU for the crisis in Greece. He added that the rest of Europe was now "much more prepared" for a Greek exit.

Talks on Greece's bail-out agreement resumed this afternoon, an EU spokesman said. European Commissioner Guenther Oettinger said earlier on Monday that the EU was working to reach a deal with Greece this week, ahead of its IMF repayment deadline.

Mr Pill said if the government exhausted its current cash reserves, they may not be able to pay the salaries of Greek public workers, which was "likely to change dynamic of negotiations".

"The intensification of the liquidity shortage will demonstrate that the platform on which the current Greek government was elected is simply infeasible," said Mr Pill.

Alexis Tsipras, Greece's prime minister, said the Syriza-led government would not give in to the "absurd demands" from its creditors.

However, Goldman said a default by the Greek government would not be "quite as black and white as it might initially appear". He added that Europe could not simply force Greece out of the eurozone.

Mr Pill said: "By nature, sovereign defaults are political processes and, via grace periods and reviews, the rules and procedures governing payments to the IMF and European Central Bank embody a large element of discretion and flexibility. For example, the possibility of bundling June obligations to the IMF into a single end­month payment has recently been entertained.

"More importantly, euro exit is a political decision. For sure, the Greek authorities could decide to exit in a unilateral manner. But the current Greek government has no mandate to do so: if it announced an intention to leave the euro area pre­emptively, in our view the government would likely fall. Moreover, there is no process for euro exit defined in the governing European treaties: the practical and legal challenges could not be resolved overnight."

Greece may need to default to break impasse, says Goldman - Telegraph