PARIS--(BUSINESS WIRE)--Time is running out for Greece and its official creditors, according to new analysis released today by IHS Inc. (NYSE: IHS), the leading global source of critical information and insight.
With no access to bond markets and increasing funding pressures, Greece desperately needs official funds to avoid a default and the coalition government may be choosing between its survival and economic collapse.
“The SYRIZA-led coalition is trapped between a rock and a hard place,” said Diego Iscaro, senior economist at IHS Global Insight in an IHS briefing at its Parisian headquarters. “Even if an agreement is reached, there will continue to be significant uncertainty regarding SYRIZA’s ability and willingness to comply. Moreover, the stability of the SYRIZA-led coalition may be compromised if the government ends up giving up on many of the promises made before the election.”
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Chance of Greece not reaching a deal: 40 percent
IHS believes that there is a 40 percent chance of a deal not being reached by the end of April.
Although both parties are likely to reach a deal, the confrontational tactics used by the SYRIZA government and its lack of experience mean that a collapse in the negotiations should not be discarded. Pension, VAT and labor reforms will all present difficult challenges for negotiations. Rising tensions between Greece and Germany, the new government’s lack of experience, and relaxed markets are all reasons to be concerned about Greece’s ability to agree and implement reforms.
A failure to obtain official funds would surely result in Greece entering a default, possibly as soon as the second quarter of 2015. If this scenario materialises, Greece’s Eurozone membership will be in jeopardy.
If Greece enters a default, the European Central Bank (ECB) is expected to stop its support for the financial sector. “Without the ECB’s support for its banks, the economy would suffer an acute shortage of liquidity,” Iscaro said. “A Eurozone exit could become the only alternative for Greece.”
Greece’s production structure shows no benefit from Grexit
Greece’s economic structure suggests that the economic benefits from leaving the Eurozone will be limited. Greece’s manufacturing base is shallow, while the share of manufacturing and tradable services in the economy is below 25 percent of the economy.
Moreover, even if the nominal exchange rate depreciates, it is likely that higher inflation will more than counterbalance the impact of the weaker currency on the real exchange rate. This suggests that Greece’s cost competitiveness position may not improve as much as desired under a Greek exit scenario.
Firewalls to contain impact
If Greece ends up leaving the Eurozone, IHS estimates the impact on the rest of the area will be limited by the firewalls put in place in recent years, such as the European Stability Mechanism (ESM) and, in particular, the ECB’s outright monetary transactions. The impact of a Greek exit on bond markets will also be dampened by the recently announced quantitative easing program. However, it is also likely that markets will question the future Eurozone membership of countries where anti-austerity parties gain in popularity. These concerns will certainly increase if the Greek economy performs better than expected outside the Eurozone.
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