With the June 30 deadline for Greece’s debt payment fast approaching and markets beginning to panic, Angela Merkel is taking a hard line against Greek negotiators. On Thursday June 18, the German Chancellor insisted that concessions be made from Greece in order to restart the flow of funds from its European creditors. (Source: The Wall Street Journal, June 18, 2015.)
When negotiations stalled over the weekend, European stocks fell and Greece’s stock market hit a three-year low.
Merkel’s statement came ahead of a meeting of eurozone finance ministers. Both sides entered the meeting with inflexible bargaining positions, a poor indicator of the will to compromise. EU officials are demanding Greece cut the size of its welfare state, particularly in funding its pensions. However, Greek Prime Minister Alexis Tsipras is vehemently opposed to the idea. Unsurprisingly, the meeting ended with no tangible results.
“Greece has received unprecedented solidarity over the last five years,” said Merkel. “The basic principle still applies: help in return for reforms.”
Before the speech, analysts were divided on whether the Chancellor would try to bridge the gap between the two entrenched forces. The refusal to budge caused a market sell-off. By mid-day, the Athens Stock Exchange fell 3.6%, bringing the week-long pullback to 15.4%. (Source: Bloomberg, June 18, 2015.)
In a speech the previous day, Federal Reserve Chairwoman Janet Yellen warned that crossing the June 30 deadline would create spillover effects. Failure to reach a compromise would likely hurt the S&P 500, the Dow Jones Industrial Average, and the NASDAQ. (Source: The Financial Times, June 17, 2015.)
In the Case of Default
Tsipras wrote a guest article in a German newspaper on Thursday, June 18 to reject the popular notion that German taxpayers are funding exorbitant Greek pensions. Tsipras argued that Greece’s social security spending only looks outsized because of its rapidly contracting economy–“In other words, GDP declined faster than the pensions,” he said (Source: The TOC, June 18, 2015.)
Alternatively, the Greek government proposed solidifying the retirement age at 67 in order to prevent early access of pension checks. They also floated the idea of consolidating pension funds to reduce fees and other operational costs.
However, it is unclear whether these proposals will satisfy Greece’s European creditors. In the event that it does not, many market participants are preparing for Greece to leave the eurozone.