Goldman Sachs: Greece will need new elections, referendum, capital controls or default

Goldman Sachs warned on Monday morning that talks between Greece and its creditors have hit an impasse which could trigger new elections, a referendum or capital controls on bank deposits, or even a default.

Huw Pill, Goldman’s chief European economist, cautions it will be “very challenging” for the two sides to reach a deal to unlock the final €7.2bn of Greece’s bailout aid.

The situation could become a lot worse before a compromise is achieved.

The platform on which the current Greek authorities were elected – to ­­ retaining the Euro but with no further adjustment and/or external oversight ­­– is “irreconcilable” with the demands of lenders, Pill suggests.

Greece’s remaining government cash reserves will soon be exhausted if no deal is reached.

"Facing this reality, a new political mandate ­­ and thus a new government, a referendum or new elections ­­ will be required in Greece," Pill says.

Greece’s partners cannot give ground on three key principles, which aren’t compatible with Athens’ own promises:

• Retaining the Euro requires further economic adjustment in Greece;
  
• To the extent that this adjustment entails further financial support (which is self­-evident given upcoming obligations), that support will only be provided on the basis of conditionality.
  
• External oversight of the Greek economy is required so that to assess compliance with such conditionality.

Pill concludes that the current talks between Greece and its creditors are highly political, and forward­looking economic rationality is not characteristic of such interactions.

"Not only is it possible that we may need to see technical default and deposit blocks in order to come to a new programme, it may be necessary to do so in order to break the current impasse in negotiations."