Is Greece about to default - or is this just brinkmanship?

Feb 6, 2012

Ruling coalition must tell EU today if it accepts the painful reforms that go with £108bn rescue package

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GREECE'S COALITION leaders must tell the EU today whether they will accept the terms of a new £108bn bailout package after weeks of wrangling – and after failing to reach an accord on Sunday night as they had promised.

If they accept it after today's talks, the bailout will be the country's second since 2010. It will accompany an agreement with the country's private creditors to accept deep losses on the bonds they hold.

The rescue is conditional on the Greeks enacting unpopular austerity measures and the country's rulers are reluctant to be associated with them.

Prime Minister Lucas Papademos and the leaders of the main parties emerged from discussions on Sunday night with Papademos saying they had made "limited progress".

But two of those leaders sounded notes of scepticism. The far-right Popular Orthodox party's Giorgos Karatzaferis insisted he would not "contribute to a revolution that will humiliate us and ... burn Europe", and the conservative New Democracy leader Antonis Samaras said Greece was "unable to bear" the reforms.

The alternative – allowing the country to effectively go bankrupt, entering default – is unthinkable. So is this down-to-the-wire wrangling just posturing?

According to The Financial Times, the Greek politicians are guilty of brinkmanship because they "must be seen by voters to be putting up a fight" over the package, while having every intention of agreeing it.

Rate strategists Rabobank aren't coy about the 'b' word either, telling Reuters that Greek brinkmanship could harm the global economy: "We continue to see the likelihood of a Greek messy default as remote ... [but] continued brinkmanship and a dose of pre-electoral posturing in Greece itself stands to prompt further market jitters."

But the Greeks can only cry wolf for so long – if that's what they are doing – says Jacob Funk Kirkegaard of the fiscally conservative, Washington-based Peterson Institute.

After March, he writes, when Germany is expected to approve a beefing-up of the European Stability Mechanism (ESM) rescue fund, "a Greek default and possibly even voluntary exit from the euro area might be a risk worth contemplating".

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