Greece Risks Increasing as Negotiations on Aid Drag On, IMF Says

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Euro Exit Would Be `Very Costly' for Greece: Blanchard

As negotiations for Greek economic reforms drag on, a further “crisis” that would unsettle financial markets can’t be ruled out, according to International Monetary Fund chief economist Olivier Blanchard.

“An exit from the euro would be extremely costly for Greece, would be extremely painful,” Blanchard said at a press briefing in Washington on Tuesday, after stating the IMF is working on and hopes to come to an agreement with Greece. That said, “the rest of the euro zone is in a better position to deal with a Greek exit” than it has been previously.

Greek government officials have less than two weeks to present reforms before euro-area finance ministers meet April 24 to discuss the bloc’s most indebted-state in Riga, Latvia. With its cash supplies running out, Greece needs to persuade its European creditors to unlock aid to avert a default that would throw its membership of the single currency into question.

“Our base case remains that Greece is likely to cobble together a last-minute deal to avoid default, capital controls, and a disorderly exit in the immediate future,” Eurasia Group analysts including Mujtaba Rahman wrote in a note to clients today. Despite more constructive working relations “the negotiations are moving forward only incrementally.”

Market Reaction

Greek stocks fell on Tuesday, with the benchmark Athens Stock Exchange dropping 2.2 percent. Bonds also fell, with yields on 3-year Greek government notes rising 218 basis points to 23.5 percent.

In Europe, officials including European Commission Vice President Jyrki Katainen demurred when asked whether the governments are preparing for a Greek default. “What we are working for is to solve the problem, and this is mostly in the hands of Greek authorities,” Katainen said in an interview with Dutch broadcaster RTL Television.

With a monthly bill of about 1.5 billion euros ($1.6 billion) for pensions and salaries, Greek officials last week said they are targeting the finance ministers’ meeting as a deadline for approving new money. In the first two weeks of May alone, Greece must make payments to the IMF of nearly 1 billion euros.

The negotiations on more aid are focused on honing an initial agreement reached in February over reforms including tax collection and maintaining sales of state-owned companies. That was struck a month after Greek Prime Minister Alexis Tsipras was elected on a platform of rolling back austerity measures.

Red Lines

Greek officials have insisted that the government maintains so-called red lines it won’t cross, including pension cuts, sales-tax increases and plans to reintroduce labor-market regulations scrapped by previous administrations. Another flashpoint between the sides includes planned legislation to protect indebted households from lenders auctioning off primary residences. The ECB has criticized that in an opinion on its website.

“There will be no more austerity measures,” Greek Defense Minister Panos Kammenos said in an interview broadcast on Ant1 TV today. “This government won’t sign a new memorandum.”

All sides must work together to keep the country in the common currency, European Union foreign policy chief Federica Mogherini said Tuesday.

If one country fails, “we all risk to fall together,” Mogherini said. “We sit in the same boat.”

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