Negotiations between Greece and its European creditors fell apart on Sunday as delegates came to an impasse over spending cuts. To fund the interest payments on its debt to the International Monetary Fund (IMF), Greece must find a resolution before June 30, 2015. The European Union (EU) ceased its aid program to Greece 10 months ago, adding pressure to reach a deal. (Source: The Wall Street Journal, June 15, 2015.)
The dispute centers around a $1.8 billion payment that comes due at the end of the month. In order to finance the payment, creditors are demanding that Greece cut its pensions and increase value-added taxes. The Greek Prime Minister, Alexis Tsiparis, rejected the deal, demanding instead that creditors “write down” the owed amount. His party rode to power on an anti-austerity campaign and are attempting to revive the economy without gauging social services.
Worst Case Scenario: A “Grexit”
The collapse of talks between Greece and its creditors revives the possibility of it leaving the eurozone. There is optimism that a deal can be reached on Thursday, June 18, when talks resume. But investors worry that the departure of one country from the single currency union would sow instability in global markets. As a result, U.S. stocks declined roughly one percent on news of the stalemate and the German DAX fell by two percent.
If a deal is not reached, Greece’s banks will lose access to emergency funds from the European Central Bank (ECB). Shares in four of Greece’s largest banks already fell between 7.5% and 15%. In order to stabilize the economy, PM Tsiparis may have to force capital controls on the nation’s new currency.
The Road Ahead
As both sides strategize on how to close the gap, markets will be volatile. The upper echelon of Europe’s political leaders will meet Thursday in Luxembourg to try and reach a settlement. In an effort to quell market turbulence, ECB President Mario Draghi refused to comment on the prospect of a Greek departure, reiterating that all parties hope to resolve the crisis soon. While history suggests that a last-minute deal is on the horizon, the structural deficiencies of the eurozone continue to roil financial markets.