By John Foley/(Reuters)
Who benefits if Greece defaults on its debts? Neither its creditors nor its obstreperous government. That is the best reason to hope that tense talks on whether the country deserves the next slice of an 86 billion euro bailout will end amicably before around 6 billion euros of debt comes due for repayment in July. If rationality prevails Greece will still be in a mess, but not at the brink.
The reason the country’s negotiations have dragged on for so long is that all sides are being unreasonable in their own ways. Germany, de facto lead creditor, refuses to go ahead unless the International Monetary Fund does too, even though the international lender brings ever less to the table. The IMF itself is insisting that Greece’s ruling Syriza government make politically toxic pledges in order to meet a fiscal surplus target of 3.5 percent of gross domestic product. And Syriza is refusing to cut generous pensions or lower the country’s too-high income tax threshold.
The question is who blinks first. If the IMF backs down it will look weak, but if it walks away the institution will look as if it doesn’t care about Europe. Germany would have to go back to its parliament to get new approval for a revamped Greek rescue plan – a particularly tricky request in an election year.
That leaves the next move to Syriza. If Prime Minister Alexis Tsipras really feels creditors are asking for too much, he can call an election. That would probably hand power to the rival New Democracy party, which might be able to persuade creditors to take a softer position. Equally, a new government might just inherit the same problems.
Investors are not assuming the worst. Ten-year Greek government bonds yield 7.1 percentage points more than their German equivalents: that spread is still narrower than it has been for almost all of the past two years. The market’s relatively relaxed stance makes sense if Syriza either backs down or is booted out of office – the two most likely outcomes. In either case, Greece could avoid an immediate default. But for a country that the IMF expects to suffer double-digit unemployment “for several decades”, any short-term relief is no great comfort.