Poll shows even chance of Greek default

There is an even chance of Greece defaulting on its debt payments, according to economists polled by Reuters, although the probability of it leaving the eurozone is still only one-in-three.

After months of negotiations between Greece and its creditors, talks abruptly derailed on Sunday leaving Athens with about two weeks to find a way out of the deadlock before a 1.6 billion euro ($1.8 billion) payment to the International Monetary Fund is due.

News of the breakdown of talks led investors to dump Greek stocks and bonds. Yields on the two-year government bond soared to over 30 percent on Tuesday.

The sticking point in the negotiations is the demand to cut wages and pensions and introduce more taxes, which Prime Minister Alexis Tsipras has so far rejected, saying austerity has heaped misery on Greece’s citizens without reward.

The IMF, European Union and the European Central Bank insist Athens must accept reforms to repair its finances in return for another bailout that would help it meet its debt obligations.

With both Athens and its creditors refusing to give further ground, economists polled after talks derailed over the weekend gave a median 50 percent probability of Greece defaulting on its debt.

“The Greek government is determined to push its creditors right up to the final moment. There is a chance that, even if Greece fails to meet its obligations to the IMF at the end of June, it remains in the eurozone,” said Azad Zangana, economist at Schroders.

The poll concluded there is about a one-in-three chance of Greece leaving the euro zone, a probability that has largely remained constant over several months of Reuters polls asking that question.

The 50 percent default probability, however, shows economists still see potential for a last-minute deal that would avert a Greek bankruptcy and exit from the eurozone – an unprecedented event that many say could rival the fall of Lehman Brothers in 2008 in its impact on financial markets.

The risk of Greece abandoning the euro was cited by many economists as the biggest risk to the eurozone economy, followed by renewed weakness in the US economy where interest rates are expected to rise later this year.

The euro zone economy, the poll found, will likely grow at a lackluster 0.4 percent rate in each quarter from now until the end of 2016, barely changed from last month’s consensus and no more than it did in the first three months of the year.

So far, weak lending to private businesses has held back the economy despite the ECB pumping trillions of euros worth of cheap money into the banking system hoping banks will lend on some of the cash to small and medium-sized firms.

Private loan growth, a key measure of success for the ECB’s stimulus programs, is flat in the eurozone now after declining on an annual basis for two years.

While that may improve slightly in coming months, most economists who answered an extra question do not expect net private lending to grow at a double-digit rate yet.

That measure “will remain lower than before the (financial) crisis for several reasons, the main one being lower potential growth,” said Karsten Junius, economist at J. Safra Sarasin.

“Households will expect a lower lifetime income against which they could borrow today.”

The poll also showed inflation would pick up over the coming quarters, at a slightly faster pace than earlier thought, although nowhere near the ECB’s target ceiling of 2 percent.

Inflation is expected to pick up pace to 0.4 percent in the third quarter followed by 0.8 percent in the fourth quarter. It will likely average just 1.3 percent in 2016.

Eighteen of 28 economists said they expected higher energy prices to be the primary driver of inflation in the eurozone over the coming months.