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Greece posses risk to financial stability

June 8, 2015

Greece, Topsy Turvy once gain ! But is this a win win situation for the Syriza party ? PM Alexis Tsipras kept his party policy alive by refusing to accept IMF reform proposal, terming it as harsh and did not repay Euro 1.5 Billion that was due date last week and not wanting to extend until June 30.

Newly elected Syriza party that won Greece election in January 2015 did not agree to IMF austerity program that was conditional, which matured on 28th February 2015. Greece refused to agree with the bailout terms and conditions agreed by previous government, calling its method/working incorrect.

Considering, it is a newly elected Greece government, IMF extended bailout program by 4-months, putting condition that it will honor its debt obligation and bring structural changes. The problem is that the economy is in recession and is contracting and therefore, revenue collection is cramping making public finance difficult.

The real challenge will be faced by the Greece government in next 2-months time, when large size payment of roughly $  40 billion is due, which will never be possible without another bailout.

Good guess is that there could be two possibilities one is that Greece is close to the departure gate and preparing for a Euro-zone exit. The second possibility is that by refusing to meet its debt obligation Greece has made a strategic move, as it also provide time to negotiate.

This delay will provide space to both, the lenders abroad and its leaders at home that may re-consider its harsh stance. It raises the possibility of referendum in Greece to finally decide that if Greece should stay in the Euro-zone region or should opt for a exit route.

Further, G-7 is meeting this weekend, though Greece is not in its agenda, but the issue is so huge that it should not escape from discussion, as interest of a developed countries must be there. Hence there is scope of last hour deal June end.

However, any delay in debt discussion will certainly add pressure on Euro, which will increase risk for sharper losses, unless there is a quick shift in policy.

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