Technical talks between Greece and the Troika concluded today without a deal, another setback for Greece as domestic financial stress mounts. Robin Brooks at Goldman-Sachs makes the important point—financial conditions have tightened sharply, and will have adverse and destabilizing effects on growth regardless of whether there is a deal next week between Greece and its European creditors on a reform package. Household deposits in Greece (red line in the left chart) and deposits in non-financial corporations (right chart) have fallen sharply, causing a destructive tightening in financial conditions at a time when banks are already in trouble and constricting credit. (Anecdotal evidence suggests this trend is continuing, with additional outflows from Greek banks in March.) At the same time, a severe squeeze on fiscal resources is forcing the government to make tough decisions about who to pay and who not to pay—which I have called “the politics of arrears”.
Greece is running out of money. Greek Prime Minister Alexis Tsipras’s meeting this week with German Chancellor Angela Merkel has taken some of the toxicity out of the conversation for now, but cannot mask Greece’s current collision course with its creditors. Committed to a platform on which it was elected but that it cannot pay for, and with additional EU/ECB financing conditioned on reform, the Greek government is likely to run out of money in April (if not before). If past emerging market crises are any guide, the decisions that it will then confront about who to pay and who not to—the politics of arrears—will present a critical challenge to the government and likely define the future path of the crisis.