The ball is in the camp of the Greek government….
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Didier Borowski (photo) , Head of Macroeconomics, und Tristian Perrier, Strategist, bei Amundi
Yesterday’s Eurogroup summit failed to reach a deal.
An exceptional meeting of Eurozone leaders will be held this Monday, with the regular EU summit on 25-26 June seen as the very last chance to secure a deal before the 30th June.
30th June is a double deadline:
• It is the day on which Greece has to pay € 1.6bn to the IMF, a payment Greece says it cannot meet. In theory, a 30-day grace period may be obtained although Christine Lagarde dismissed this possibility.
• It is also the day on which the official European bailout framework – that was extended in February – is due to expire.
Beyond that, another critical date will be the 20th of July, when Greece must also repay the 1st half of a €7.2bn tranche to the ECB, a sum that it definitely cannot pay without additional aid.
Due to accelerating deposit flight, it is uncertain whether Greek banks can open next Monday. A unscheduled teleconference will be held by the ECB today to discuss the request from the Bank of Greece for additional Emergency Liquidity Assistance (ELA).
We see three types of scenario.
SCENARIO 1: THE LAST-MINUTE AGREEMENT (before 30th June)
• We still believe in a last-minute agreement before June 30th, of the type that the Eurozone is familiar with. It remains our central scenario.
• Actually, we should not be overly surprised by the political difficulties encountered in seeking an agreement. The gap at the outset between the two sides – creditors on one hand, and the government on the other – was huge on all the key issues (pensions, VAT etc.)
• According to the Bank of Greece, both camps have never been so close to reaching an agreement: “From all the evidence available so far, it seems that a compromise has been reached on the main conditions attached to this agreement and that little ground remains to be covered.” (Bank of Greece, monetary policy report, 17th June).
• If it’s true, how should we interpret the current political mess? From a pure political standpoint, it is somewhat rationale for the Greek government to postpone a formal compromise to the very last minute. Indeed, it would demonstrate (to the Greek people and to the parliament) that the government members have done their maximum to obtain the best possible compromise (it is very important to ensure political stability). Against this backdrop, it also makes sense for EZ policymakers to prepare for no Greece deal, and to be very vocal…
• Thus, a peak in financial stress cannot be ruled out in the coming days as the perceived probability of success could fall. Rising uncertainty implies more volatility, even more so in the case where Greece has to implement capital controls.
• At the end of the day, even in the best-case scenario it will probably be a weak deal and certainly not a definitive solution. But it would be very positive for financial markets.
What if we are wrong? We must explore alternative scenarios.
SCENARIO 2: AGREEMENT BUT AFTER 30th JUNE
• A second type of scenario is one where a deal is also reached, but only after the 30th June deadline, after the expiration of the bailout framework, potentially with the start of a default process to the IMF and the implementation or strengthening of capital controls to counter the deposit flights.
• Indeed, failing to meet the 30th June deadline does not necessarily mean Grexit
Discussions may continue beyond this date.
An additional development could be that the Greek government would organize either a referendum or new elections. We have to remember that, according to latest polls, most Greeks want to stay in the euro even at the price of a painful compromise.
Regarding the ECB’s attitude, as Mario Draghi said: “The ECB is not a political institution. Politicians must decide on Greece, not central banks”. He added: “There is no pre-set ceiling for Greek ELA”. It is thus clear that the ECB would continue to keep the Greek banking system, and therefore, the Greek state, solvent as long as talks between Greece and its creditors do not break down, although this may change, of course, if Greece defaults to the ECB itself on 20 July.
So there is still a possibility of a deal between 30 June and 20 July. Combining the scenario 1 with that intermediate scenario, our call is still that, one way or another, a deal will finally be reached and that Greece will remain in the EZ for the moment.
Note that in the scenarios 1 and 2, the “deal” could include additional restructuring of debt (a sort of an orderly default). Indeed, in theory, a government which needs no financing (primary surplus) can default within a monetary union. Such an option would necessitate a close coordination between EZ governments, the European commission and the ECB.
SCENARIO 3. THE WORST CASE. DEFAULT AND GREXIT
• In case talks break down completely, leaving the ECB with no choice but to remove its lifeline to the Greek banking system (although it would probably require political greenlight to do so), printing a new currency (e.g. IOUs to pay civil servants) may become the only solution for the Greek state to keep functioning, paving the way to Grexit.
• This would also involve a lot of negotiations between Greece and its creditors on the precise steps in this process, the extent of defaults to European institutions and the country’s relationships not only with the EZ but also with the EU.
3.1. What would happen to Greece?
• Definitely more pain for several years. The Greek has already been through a depression. The social consequences that would result from a new slump could put at risk the political regime.
• A recovery would be possible in the medium to long term, although we should not expect too much from it as the country will remain constrained by its structural economic problems.
3.2. What would happen to the EZ?
• First, keep in mind that Greece is not a systemic country per se:
It represents less than 2% of EZ GDP. Thus the direct impact, through the trade channel, would be negligible.
Private investors are very little exposed to the Greek risk (the market debt represents around 12% of the total Greek debt). The IMF, ESM, EFSF and the ECB hold nearly the two-thirds of the Greek debt.
• Second, from an economic standpoint, there is little rationale for contagion:
The economic situation in several peripheral countries has markedly improved since 2011-12. Thanks to structural reforms, they have regained in competitiveness and current accounts are back in surplus.
· Bank interest rates charged to SMEs have substantially declined since 2011-12 in peripheral markets.
· As a result, the on-going recovery is stronger in peripheral markets (Spain, Ireland and Portugal) than in core EZ economies. This is a major difference with the economic context in 2011-12.
• Having said that, the ECB would immediately intervene to prevent contagion. The recent ECB declarations are unambiguous:
Benoit Coeuré recently declared (about the recent surge in bond yields): “the ECB does not intend to counter that volatility in the short term, which would effectively give market participants a free insurance policy.” (but…) the ECB will not allow excessive fluctuations in financial markets to threaten (…) price stability in the medium term. (…) For this reason, he added: “purchases of securities will continue until September 2016 at least, and longer if necessary.
Mario Draghi added at the European Parliament on 16 June: “We are closely monitoring conditions to detect signs of an unwarranted tightening of our stance, to which we would need to react.” He added that the ECB has “all tools available”. In particular, it implicitly means that the OMT programme could be activated for peripheral countries.
The ECJ just confirmed on 16th June that the Outright Monetary Transactions (OMT) programme announced in 2012 is compatible with EU law.
The ECB is very clear about the objective of this programme: “The bond-buying programme was created in order to preserve the singleness of monetary policy in the EZ and ensure transmission of the ECB’s policy stance to the real economy.”
The OMT programme could be triggered in combination with a precautionary financial assistance programme (credit line) from the ESM.
• Note that we should not rule out ECB interventions if contagion even in the scenario 2.
• However, the main consequence, over the long term, would be that the very nature of the EZ would be modified, with very uncertain consequences, as one member state would have cleared a path of exit and put an end to the principle that Euro membership is irrevocable. As Mario Draghi mentioned, there may be the need of a “Quantum Leap” in institutions to keep the EZ together over the long term.
In a nutshell, the most probable scenario is that Greece remains in the EZ, probably with an additional debt restructuring (but only for the public sector).
While we cannot rule out some excessive market reactions, with a new peak in financial stress, we believe that this market reaction would be short-lived.
Fonte: BONDWorld.it
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