Greece wants to stay in the euro - but that won't be enough to stop a Grexit

By Mike Bird

Despite the recent optimism coming from Athens, it looks like there are still big roadblocks in the way of a bailout deal. The government is running out of cash - it may practically already be dry. It has both pension and salary payments to make at the end of May, and a debt repayment to make to the International Monetary Fund (IMF).

If that payment isn't made, the Greek state would technically default. In that case, the European Central Bank (EBC) could pull its credit lifeline to the Greek banking system, and Greece might have to begin the process of leaving the euro.

At least, that's the possible chain of events. Most analysts seem to think that in the end, Greece's popular attachment to the euro will stop a Grexit (Greek exit from the eurozone) from happening. They're expecting an 11th hour deal - though the 11th hour seems to be lasting for months.

But Gabriel Sterne of Oxford Economics thinks that Greece's strong support for the euro won't be enough to keep it in the bloc.

Sterne is also dismissive of the possibility that there's be a "Graccident" - an accidental exit in which the Greek government thinks it has longer than it really does before a default, and the event springs up on them:

The Graccident hypothesis is dangerous for Greek asset holders because it implicitly underestimates fundamental differences between the two sides... If Greece exits it will be because the acceptable solutions for each side do not coincide. Each side's red lines relate to the primary surplus, and by implication debt relief and new lending. And if exit occurs soon, it will partly be because both sides are fed up of can-kicking.

In short, a Greek exit won't be an accident. Everyone knows the risks and if it was easier than this to reach a compromise, it would have happened already. The institutions Greece gets its bailout loans from want pretty severe austerity measures and reforms that would make a Thatcherite government happy - while the new Greek government is the most left-wing in Europe's recent history.

But most of the people in Greece seem to want to keep the euro, even if the cost is prolonged further austerity. Polls show that even when a return to the Drachma is compared to staying in the eurozone and accepting another strict set of austerity measures, Greece prefers the euro. But as Oxford Economics notes, there's no sign of the Greek public warming to Grexit's alternative either.


Syriza main extremely strong in polls, and New Democracy (the previous centre-right government party) have seen their support collapse, though they have the only policy platform which really guarantees that bailout money.

Sterne lists other reasons to think Greece might exit: Alexis Tsipras seems to be very popular, and he isn't getting less so as support for his negotiating strategy declines. Any referendum would likely not be phrased as a yes-no question about eurozone membership. It's more likely that the question would be whether to accept whatever austere deal the creditors offer, which could boost support for a "no" vote that would eventually cause an exit.

Deutsche Bank is now putting a 70% probability on Greece not paying the International Monetary Fund what it's due on June 5. That's split into a 40% probability that no deal is reached at all, and a 30% probability that even with a deal, the government either won't have the political will or the time to push the necessary reforms through parliament.

Oxford Economics' judgement is very similar: There's a 67% chance of a deal being struck, but even if that happens, a 40% chance of it going off the rails and requiring capital controls.

In that event (capital controls), the consultancy sees a 70% chance of a Grexit - once Greece shuts itself off from the rest of Europe, it would be extremely hard to come back again.