Is Greece Nearing The End Of The Road? by Darren Williams, AllianceBernstein

Greece and its euro-area partners have yet to reach a deal to secure long-delayed bailout funds. Without these funds, Greece could run out of money in a matter of weeks, raising the real prospect of a default on payments due to its official creditors.

Greece’s government and its euro-area partners remain at loggerheads over a reform package to unlock bailout funds. The lack of progress has dashed hopes of a breakthrough in April. As a result, attention is now focusing on the next looming deadline—a Eurogroup meeting on May 11, a day before Greece needs to repay €0.8 billion to the International Monetary Fund (IMF).

Some observers (and representatives of the Greek government) argue that we shouldn’t be too alarmed by the current stand-off; that it’s all part and parcel of the tortuous process through which the European Union reaches difficult decisions.

There’s an element of truth here, but only an element. The level of hostility currently on display, and the way other euro-area countries and the European Commission have criticized the Greek government’s intransigence over reforms is totally unprecedented, in our view.

And there are fundamental differences of opinion between the Greek government and its euro-area partners about the way ahead. Greek Prime Minister Alexis Tsipras recently highlighted four major areas of disagreement: labor market rules, pension reform, privatizations and value-added tax. The first three of these are reforms that every other euro-area government would regard as essential if Greece is to modernize its economy and improve its long-term-growth prospects.

Exactly how this will play out is still difficult to gauge. But one thing is clear: if Greece doesn’t budge, it isn’t going to get any more money from its euro-area partners. And if it doesn’t get new funds soon, the Greek government is likely to start running out of cash.

Unfortunately, we don’t have enough data to know when the situation is likely to come to a head. There have been conflicting indications from official sources. By commandeering funds and delaying payments to suppliers (and crippling the economy as a result), the government might be able to hold things together for a short while yet.

Cash Crunch Looms

But Greece is clearly running out of road and the crunch could easily come during May. If it does not, it will almost certainly occur in June (when another €1.5 billion is due to the IMF) or July (when €0.5 billion is due to the IMF and €3.6 billion is due to the European Central Bank) if no new funding is made available.

When (and if) we reach this point, the Greek government will have to choose between paying wages and pensions and repaying its official creditors. Going into arrears with the IMF would be a first for a “developed” economy. But prioritizing debt repayments over wages and pensions would represent a flagrant betrayal of the new government’s electoral mandate—and would be very damaging for it politically.

We should therefore regard the risk of some form of default as being a very real possibility. Were this to happen, Greece would probably have to impose capital controls in order to limit deposit/capital flight. None of this would automatically lead to Greece leaving the euro, but the risks of such an outcome have clearly risen in recent months.

Adverse developments in Greece have also started to spill over into other peripheral bond markets. Until we get greater clarity on Greece, we should expect heightened volatility to continue.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

Darren Williams is Senior European Economist at AllianceBernstein.

Is Greece Nearing The End Of The Road?