The debt negotiation talks between the EU the IMF and Greek ministers collapsed after lasting for only 45 minutes on Sunday. Is it a sign that the Greek no longer intend to reach a compromise or is it just one of its ‘political playing cards’ that aims to secure an advantageous last-minute bargain deal? Or perhaps neither?
The immediate consequence of this collapsed talk is reflected in the stock market decline, as a result of heightening fears for the future of Greece, and potentially severed prospects of its EU tie. The reality is that the spending cut outlined by the creditors, which amount to €2bn (£1.44bn), is practically difficult to implement. According to figures from the BBC, Greece debt currently amounts to €320bn, which is equivalent to 177% of its country’s GDP, indicating the magnitude of the significance of the debt level, which accompanied by soaring unemployment rate and stagnant economic growth is a serious cause for concern. Additionally, the specified spending cuts which involve both pension cuts and increases in VAT are likely to hurt the poorest Greeks, since the nature of these austerity measures are regressive.
For Greece, at this critical moment, tackling the €1.5bn (£1.1bn) debt repayment to the IMF is perhaps every bit as urgent. If Greece were to default on this repayment by the end of June, then it is likely to trigger a chain of blasts across Europe, across each single nation within the Eurozone that supplies cash to the IMF, then it may set the stage for another ‘Lehman-esque’ crisis, which is certainly unpleasant for all parties involved.
On the other hand, Greece may be on the verge of ‘Grexit’, either forced out of Eurozone or to leave voluntarily, which could mean that Greece could reduce its government deficit without being constrained by its Euro straightjacket, by printing more of its original currency, the Drachma. However, this wound indeed lead to potential inflation and the likelihood of dramatic rising prices that drags down standards of living. What’s more, both Grexit and default scenarios would contribute to the flight of capital, which would further exacerbate the further decreases cash and growth potential of Greece. Transaction costs arise from each activity-taking place between a country and Greece, which should inflict another burden to its already weakened economy. This is how it is illustrated as the most critical decision time for Europe and Greece to reach a compromise respectively so as to save mutual losses.
“There is a limit to how much financing and debt relief official creditors are willing and realistically able to provide given that they have their own taxpayers to consider”
Olivier Blanchard, IMF Chief Economist
It makes sense for a delay in bail-out funds by the EU to rescue Greece, because each EU country is acting in its national interest, an injection of funding from member countries is a leakage in domestic spending on welfare.
The EU has already made a compromise to reduce the scale of austerity required by Greece but emphasise on how spending cuts are realised. Since the time for striking a bailout deal with the EU is nearly running out along with the fact that it is in desperate need of sufficient funds, there is scope for things to turn around, where the Greek Ministers may keep the repayment on time in this June while negotiating alternative ways of practically and sustainably implementing some form of austerity measures, and on the other hand, there should be a leader in the EU to extend an olive branch to Greece, as a pact for European solidarity.