Syriza Split Looms as Left-Wing Propose 'Icelandic-Style Default'

Syriza split
Greek Prime Minister Alexis Tsipras attends a parliamentary session for the briefing of lawmakers over the ongoing talks with the country's lenders, in Athens, Greece June 5, 2015. Alkis Konstantinidis/REUTERS

Greece's ruling Syriza party may be in danger of splitting as left-wing radicals propose a default on the country's international debts and the nationalization of its banks.

The Daily Telegraph reported that a confidential plan for an "Icelandic-style default" will be put forward in the next few days by members of Syriza's Aristeri Platforma (Left Platform) and has gained the support of at least 30 MPs, or one-fifth of Syriza's total parliamentarians.

The example of Iceland, which in late 2008 nationalised its three biggest banks when they defaulted on assets worth 10 times more than the country's annual economic output, is being cited as a potential path for Greece to follow.

Since its catastrophic collapse, Iceland has slowly recovered, with its economy growing each year since 2011 and economists predicting a 3% increase this year.

Negotiations between Greece and its international creditors - the International Monetary Fund, the European Central Bank and the European Commission - broke down again this weekend, causing Greek stocks to fall by 5% on Monday.

Greece owes the IMF a further €1.5bn before the end of the month, with €452m and €3.5bn due to the IMF and ECB, respectively, in July.

The new proposals, which reportedly would also be backed by the nationalist ANEL party which is in coalition with Syriza, would likely be accompanied by a return to the drachma and thus almost certainly necessitate an exit from the eurozone.

It would involve the creation of a sovereign central bank to prop up the new financial system. This would function as a so-called 'bad bank', into which Greece could shift its illiquid and high-risk securities to reduce uncertainty and get its financial system back on track.

It would also entail the imposition of capital controls - restrictions on the amount of money which can be withdrawn and transferred from banks. In Cyprus, where capital controls were implemented in 2013, cash withdrawals were limited to €300 per day.

Greek prime minister Alexis Tsipras is holding out for a deal with the country's European creditors and is striving to hold his party together by rejecting the international creditors' demands to slash wages and pensions.

Raoul Ruparel, co-director of London-based policy thinktank Open Europe, says that while the balance remains slightly in favour of staying in, the future of the party is hanging in the balance as support for Grexit continues to grow.

"Quite a large swathe of the hard left in Syriza are considering now whether Grexit is a better option," says Ruparel. "If Tsipras put a deal on the table which is basically what the eurozone wants, it would be very hard for him to hold his party together."

A key difference between Iceland and Greece is that Reykjavik has its own currency, the Icelandic krona, which it allowed to depreciate drastically in order to boost exporters' competitiveness.

The krona's value is still 30% below pre-crisis levels while export volumes are 10% higher than they were at the end of 2007. The tourism industry, which is similarly important in Greece, has done particularly well, with visits increasing by more than 300,000 between 2008 and 2014.

However, Ruparel says that if it were to follow the Icelandic path, Greece would still have to undergo tough austerity measures. By some estimates, Iceland has engaged in 30% more austerity than Ireland and double that of the UK.

"Iceland has done a huge amount of austerity itself. So it's [currency] devaluation wasn't a question of that instead of austerity, it was both default and devaluation as well as austerity," says Ruparel.

Greek negotiators will meet again with their international counterparts on Thursday in a bid to hammer out adequate reforms to unlock the next tranche of IMF funding before the 30 June deadline, when Athens' current bailout deal expires.