When both sides engage in brinkmanship in a power contest and find themselves at last genuinely at the brink, the chances for an "accident" which neither side wants have rise substantially. That is where Greece and its creditors, the Eurozone and the IMF, find themselves after the European finance ministers and Greece failed yesterday to make a breakthrough. This impasse led to the scheduling of an emergency meeting Monday of the European Heads of State ("adults," in the words of the IMF).
Meanwhile Greek banks are experiencing an accelerated withdrawal of funds. There are fears that unless the European Central Bank provides additional funds this weekend, the banks will not be able to open on Monday, and capital controls will have to be imposed.
The IMF hardened its line against Greece. It announced that if Greece failed to make the $1.8 billion debt payment due in less than two weeks, there would be no grace period. Greece will be in default.
Greece has to yield by committing to some further reforms. This may require Alexis Tsipras, the Greek Prime Minister, to first remove and replace some of his hard-line ministers. He and a majority of Greeks wish to stay in Europe and with the euro. Hard-liners could then possibly cause the government to fail and force a new election. On the other hand, if the Greek government does not blink and causes Greece to go over the brink (which would be a true disaster for the Greek people and for the future of the euro), the government would be even more likely to fail.
In the meantime, Tsipras finds this a good time to be meeting with Vladimir Putin in Russia, presumably hoping to get some help. This strategy will go down badly in Europe and harden attitudes there about reaching a compromise with Greece. Perhaps it is not a coincidence that France and Belgium have moved to seize Russian state assets. Their move relates to the results of an arbitration panel in The Hague in which four major shareholders of Yukos were awarded $50 billion in damages. Putin is said to be furious. If the timing of this move was meant to be a warning to Putin not to provide support to Greece, that could prove to be a mistake. It could provoke him to do just that.
We continue to think the most likely outcome will be a last-minute deal, unsatisfactory for both sides, that again kicks the can down the road, avoiding "Grexit" with no real prospect of the Greek debt’s eventually being repaid. That said, the possibility of a truly dire end to this Greek tragedy has significantly increased.
Related podcast interview:
Geopolitical Update With Stratfor’s Reva Bhalla: Greece Faces Real Crisis in July
