As its central bank warns of “painful” euro exit, would a Greek default necessarily lead to Grexit?

Can Greece have it both ways? (Source: Getty)

Dr Holger Schmieding, chief economist at Berenberg, says Yes

Greece cannot have it both ways. It can either play by the rules of the euro and return to the Spanish-style recovery of 2014. Or it can default and leave the currency bloc. Technically speaking, Greece may simply tell its creditors to get lost and otherwise try to get on with life. But that situation is not stable. European Central Bank (ECB) life support worth €120bn (£86bn) keeps the country’s banks afloat.

If Greece defaults on its €3.5bn payment to the ECB on 20 July, the ECB has to stop that bank support. Lacking any euros, Greece would have to recapitalise its banks with something else. Even worse, tax revenues are already falling even faster than GDP in the recession triggered by Alexis Tsipras.

In a month or two, Athens will no longer be able to pay full wages, pensions and welfare benefits in euros. If it can’t strike a deal with its only willing creditors by then, it has to print a new money. Grexit.

George Efstathopoulos, co-portfolio manager at Fidelity Solutions, says No

Although it’s certainly a step in a dangerous direction, a default does not necessarily mean Grexit. If Greece defaults on its June IMF obligation, it could lead to a situation where the European Central Bank (ECB) is forced to stem liquidity to Greek banks. If liquidity dries up, this could result in capital controls, which may be enough to force the government’s hand (just as we saw in Cyprus).

Of course, there are still a range of possibilities: snap elections, a referendum, a technocrat-run government, civil unrest, or even a military coup. In these scenarios, the risk of a Grexit would be higher. For now, it’s a chicken-and-egg situation, where the ECB will tread carefully in its approach to liquidity, with Mario Draghi making clear he does not want to be the cause of an accident.

At the same time, the Greek coalition is likely to view any tight liquidity policy as a conspiracy against it, making the situation even more precarious.

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