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"We Have Come To The End Of The Road" - Greece Prepares For Default, FT Reports

It should hardly come as a surprise that after the latest round of Greek pre-negotiation negotiations with the Troika, in which the Greek representative was said to behave like a taxi driver, who "just asked where the money was and insisted his country would soon be bankrupt" and in which the Eurozone members "were disappointed and shocked at Athens' lack of movement in its plans, and in particular its reluctance to talk about cutting civil servants' pensions" that the next Greek step is to fall back - yet again - to square zero: threats of an imminent default. Which is precisely what, according to the FT, has happened "Greece is preparing to take the dramatic step of declaring a debt default unless it can reach a deal with its international creditors by the end of April, according to people briefed on the radical leftist government’s thinking."

A word of advice: now that the Eurozone, foolishly, thinks it is insulated from the consequences of a Grexit due to the ECB's QE, it does not take to ultimatums or blackmail very well. In fact, it takes these very badly.

In any event, here again is the same old song, sung one more time, now by the FT:

The government, which is rapidly running out of funds to pay public sector salaries and state pensions, has decided to withhold €2.5bn of payments due to the International Monetary Fund in May and June if no agreement is struck, they said.

 

“We have come to the end of the road . . . If the Europeans won’t release bailout cash, there is no alternative [to a default],” one government official said.

 

A Greek default would represent an unprecedented shock to Europe’s 16-year-old monetary union only five years after Greece received the first of two EU-IMF bailouts that amounted to a combined €245bn.

Unfortunately for the Greeks, this threat has been used, abused, and denied so many times, nobody cares, or believes it will be used:

The warning of an imminent default could be a negotiating tactic, reflecting the government’s aim of extracting the easiest possible conditions from Greece’s creditors, but it nevertheless underlined the reality of fast-emptying state coffers.

Then again this time may be different because recall that as Reuters wrote over the weekend, "even if it survives the next three months teetering on the brink of bankruptcy, Greece may have blown its best chance of a long-term debt deal by alienating its euro zone partners when it most needed their support."

Indeed, it seems that the tone has changed dramatically in recent weeks and months, and at this point the rhetoric is one merely of managing expectations and avoiding deeper fallout once Greece is "let go."

Quote the FT: "Germany and Greece’s other eurozone partners say they are confident that the currency area is strong enough to ride out the consequences of a Greek default, but some officials acknowledge it would be a plunge into the unknown."

Negotiating tactic or not, the reality for Greece - which already has run out of money - is that it will run out of even the money it does not have (recall the government is now raiding public funds to avoid defaulting to the IMF) unless something changes:

The government is trying to find cash to pay €2.4bn in pensions and civil service salaries this month. It is due to repay €203m to the IMF on May 1 and €770m on May 12. Another €1.6bn is due in June.

 

The funding crisis has arisen partly because €7.2bn in bailout money due to have been disbursed to Greece last year has been held back, amid disagreements between Athens and its European and IMF creditors over politically sensitive structural economic reforms.

 

These included an overhaul of the pension system, including cuts in the payments received by Greek pensioners, and measures to permit mass dismissals by private sector employers.

One thing is certain: the biggest losers are - as always - ordinary Greeks, who are faced with certain capital controls in case of a Grexit and almost certain capital controls even if they do remain in the Eurozone.

In the short term, a default would almost certainly lead to the suspension of emergency European Central Bank liquidity assistance for the Greek financial sector, the closure of Greek banks, capital controls and wider economic instability.

 

Although it would not automatically force Greece to drop out of the eurozone, a default would make it much harder for Alexis Tsipras, prime minister, to keep his country in the 19-nation area, a goal that was part of the platform on which he and his leftist Syriza party won election in January.

More improtantly, a default would also afford Moscow (and Beijing) a territorial, political and financial presence in the European (Dis)union, now that Greece is being groomed to become the landing zone for the Southern Stream 2.0, a pipeline which has now terminally bypassed Bulgaria and instead will traverse Turkey and most likely Greece before entering Europe via Serbia, Hungary and Austria.

It will be ironic if soon all of Europe's gas requirements will be contingent on the benevolence of the same Greek government which Merkel and her peers have taken such delight to slam in recent months, which at this rate, is about to become another proxy pawn controlled by Putin.

As for what happens to Europe and where attention will focus next, two Bloomberg headlines from earlier today show the way:

  • PODEMOS WANTS TO HAVE DEBATE ON DEBT RESTRUCTURING: OFFICIAL
  • PODEMOS WANTS TALKS WITH CREDITORS ABOUT SPANISH DEBT