As the Greek Prime Minister Antonis Samaras prepares to meet euro zone leaders to request a two-year extension to bailout terms, both Greece and the euro zone should be prepared to not get what they expect, according to analysts.
Samaras wants international lenders to give his indebted country more time to complete reforms agreed to as part of a modified bailout earlier this year, the German newspaper Bild reported.
Analysts told CNBC however, that despite the country being at breaking point under austerity measures, it is unlikely that Greece will get what it wants.
“We’re likely to see, as a result of this, some kind of compromise in the terms that Greece accepted to ease, but not as much as it would like,” Adam Cole, Head of Currency Strategy at RBC, told CNBC Europe’s “Squawk Box”.
“The starting point for Greece is a two-year extension…the starting point for Europe is “no concessions” and in typically European fashion the outcome will be somewhere between the two.”
As uncertainty prevails over the outcome of Samaras’ meeting with Jean-Claude Juncker, head of the euro zone’s group of finance ministers, in Athens on Wednesday, European markets have already been shaken out of their recent rally.
Indeed, ahead of a European Central Bank (ECB)policy meeting on September 6, when the bank is expected to decide on a policy of euro zone bond-buying, there have also been reports that the bank could cap peripheral bond yields not solely in an effort to lower borrowing costs for Spain and Italy, but rather to stem the contagion risks from a possible Greek exit.
According to the latest report from analysts at Citi FX, “addressing how the euro zone prevents contagion in the event of a Greek exit…could be the more pressing euro zone issue.”
“Some uncertainty should linger ahead of the meetings between various Eurozone officials in coming days…We doubt that Germany in particular will change its position on the Greek demands to extend the bailout deadlines before the final Troika report is out in September, ” the report said, warning that the “big bazooka metaphor is wrong” and won’t help in the long run.
“The battle is not won by the biggest bazooka, but by the one that has unlimited ammunition,” but this still is not a panacea for the euro zone’s ill, the report continues.
The ECB needs to come up with an “unbeatable policy” to prevent contagion, if, and when, Greece exits, the report states. But it also needs to convince other “more deserving peripherals” such as Spain and Italy that they can’t receive the same special treatment
“Convincing other countries that have complied much more seriously with austerity demands, and who face the political and social downside of austerity, that they will not be granted the same indulgence as Greece, may be more difficult.”
Indeed, the report states that the euro zone cannot win on the Greece matter: Chaos will ensue if Greece is allowed to leave, but if it stays, a pervasive sense of resentment at unlimited support for Greece despite its non-compliance, could spread in the euro zone.
“The realistic answer may be that Greece should be financed because it is too small to matter…however…We may end up with a euro zone that is perpetually on the brink with perpetual threats that one country or another will be tossed or leave for noncompliance on fiscal matters.”