Documents leaked over the past few days show that the Greek government is looking for a two-year extension on the €11.5bn fiscal consolidation programme it agreed with the EU and IMF over 2013 and 2014.
German government officials have reacted angrily to the proposal, which has promoted speculation that a showdown is looming between Athens and Berlin that may see Greece depart the eurozone over the next few months.
The European Commission says it is not its policy to comment on leaked reports. However, a source close to the commission in Brussels says the next troika mission is not scheduled for Greece until September.
A review of its fiscal consolidation efforts would be conducted then and only after this review has taken place would a decision be made on whether a change would be made to the terms of its bailout programme.
However, Lorcan Roche Kelly, chief Europe strategist for the US hedge fund TrendMacro, says a Greek exit from the eurozone was highly unlikely.
“What will happen in September will be another restructuring of Greek debt. There is a very big leap between German impatience with Greece and that country leaving the euro.”
Mr Roche Kelly argues that a Greek exit would unleash a bout of turbulence across the markets that would eventually lead to the unravelling of the single currency.
“It would have massive knock on effects. It would confirm that the euro is no longer irreversible and that would have massive consequences.
“It would lead to bank runs in other periphery countries because investors would take the view that this currency is not permanent.”
Investors need to be able to accurately price the risk of investing in a country, says Mr Roche Kelly. If there is the possibility that the euro could be replaced by a local currency in any one of the peripheral countries, then there would be a massive capital flight from the region.
ECB president Mario Draghi made a speech on Jul 26 reassuring the markets that he would whatever it takes “to preserve the integrity of the euro”.
He specifically addressed the issue of convertibility risk and ruled out the possibly of countries leaving the euro.
Mr Roche Kelly says if Greece left, then “convertibility risk” would convulse eurozone markets. Moreover, the ECB would not be able to ringfence other periphery countries because the template of a country exiting the single currency would have been created.
However, Charles Dumas, the chief economist at London-based Lombard Street Research, argues that the German government will look to push Greece out of the eurozone over the next few months. “The Germans do not look at economics as a rational discipline, they see it as a philosophy and they want to punish the Greeks for their profligate ways. The euro is unsustainable with Greece and other ‘Club Med’ countries in it.”
Mr Roche Kelly says German finance minister Wolfgang Schäuble has so far taken a very pragmatic approach to the crisis.
“There will be some sort of official sector involvement in Greek restructuring in September. Athens will be given more time in its bailout programme so that they can get growth going and unemployment down. That is what they really need.”
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