Greece’s hard line will renew fears of a default

When the Syriza-led coalition took power in Greece, nobody was sure whether it would quickly head on a collision course with Europe, or whether there would be a move towards some kind of compromise.

The decision of new finance minister Yanis Varoufakis to say clearly in a meeting with EU finance commissioner Jeroen Dijsselbloem on Friday that Greece was not seeking an extension of the EU/IMF bailout, which runs out at the end of February, suggests that Greece is taking a hard line. It has also said it will not deal any further with the troika – which it has branded a “rottenly constructed committee” – instead only talking to other euro governments.

In rejecting the whole architecture around which Europe has done its business, the new government’s move will renew fears about the risk of a Greek default, instability in its financial system and even a threat to Greek membership of the euro.

Two questions

Syriza will say, of course, that it is merely doing what it said it would do during the election campaign, when it called for an end to troika-imposed austerity. Its decision not to seek a renewal of the bailout raises two immediate questions. One is where Greece will get the money to meet debt repayments due in the months ahead and the second is how its banks are going to get funding, because the European Central Bank has said its funding depends on Greece staying in an agreed programme. This threat to the banking system is likely to accelerate the flow of deposits out of the Greek banks, with depositors fearing a collapse in the system and the loss of their funds, or a forced restructuring with a writedown of their savings,such as took place in Cyprus. At the end of December the banks had more than €213 billion in deposits, but yesterday the

Financial Times

reported banking sources estimating that €700 million to €1 billion is now being withdrawn each day.

ECB funding

The banks are heavily reliant on funding from the European Central Bank, which reached €56 billion at the end of December and is likely to have increased significantly in the meantime. This is under threat if there is no formal agreement with the troika, and any emergency assistance from the Greek central bank would also need support from Frankfurt.

Greece also needs money to meet debt repayments due over the rest of the year. Greece is due to make repayments of about €15 billion on longer term loans this year, including €6.5 billion owed to the ECB. Greece’s public finances are broadly in balance, but plans for new spending are based on a large portion of Greece’s debt being written down. There was some speculation yesterday of a loan from Russia, to whom the Greek government has made political overtures, but this looks like a long shot.

Germany, Europe’s biggest creditor nation, appears in no mood to write down Greek debt, with finance minister Wolfang Schäuble saying yesterday that Germany could not be “blackmailed”. Brussels is also rejecting Greece’s’s demands for a debt conference to discuss debt across the periphery.

The signal from Europe to Greece has been that some flexibility in renegotiating debt terms might be possible, but only if Greece plays by the existing rules. Syriza, however, wants to tear up the rule book. Greece’s markets are likely to face further turmoil next week. The question is whether the nervousness will spread, or whether investors believe the Greek question can be largely contained.