Draghi, we have a problem. Despite the omnipotent buying power of the all-knowing ECB, peripheral European bond spreads are blowing out again (and stocks dropping) as Grexit fears start to spread contagiously across the continent. As Greece's cash crunch looms ever closer (with capital controls looming) [8] and bulls "throw in the towel" on the "nuts" Greeks [9], the IMF has come out and rubbed Mediterranean salt into that wound by telling the Eurogroup that Greece is the most unhelpful country the organization has dealt with in its 70-year history. As Bloomberg reports, [10] in a short and bad-tempered conference call on Tuesday, officials from the 'Troika' complained that Greek officials aren’t adhering to a bailout extension deal leaving Dijsselbloem hinting at Cypriot templates for Greece.
The 'Troika' is not happy... International Monetary Fund officials told their euro-area colleagues that Greece is the most unhelpful country the organization has dealt with in its 70-year history, according to two people familiar with the talks. As Bloomberg reports,
In a short and bad-tempered conference call on Tuesday, officials from the IMF, the European Central Bank and the European Commission complained that Greek officials aren’t adhering to a bailout extension deal reached in February or cooperating with creditors, said the people, who asked not to be identified because the call was private.
German finance officials said trying to persuade the Greek government to draw up a rigorous economic policy program is like riding a dead horse, the people said, while the IMF team said Greece’s attitude to its official creditors was unacceptable. The German Finance Ministry didn’t respond to multiple requests seeking comment.
Concern is growing among officials that the recalcitrance of Prime Minister Alexis Tsipras’s government may end up forcing Greece out of the euro, as the cash-strapped country refuses to take the action needed to trigger more financial support. Tsipras is pinning his hopes for a breakthrough on a meeting with ECB President Mario Draghi, German Chancellor Angela Merkel, French President Francois Hollande and European Commission head Jean-Claude Juncker this week in Brussels.
...
Euro-region finance ministers are urging Greece to draw up a plan to fix the economy in exchange for emergency loans to keep the country afloat. As Tsipras challenges his creditors to blink first, his government’s money is running out, raising the prospect of a cash crunch as early as this month. The country faces more than 2 billion euros in debt payments Friday, and government salaries and pensions must be at the end of March.
...
The call with euro-area finance officials came after the group’s chairman, Dutch Finance Minister Jeroen Dijsselbloem, said the country could use capital controls to remain in the currency union.
“It’s been explored what should happen if a country gets into deep trouble -- that doesn’t immediately have to be an exit scenario,” Dijsselbloem told BNR Nieuwsradio. For the 2013 Cypriot bailout, “we had to take radical measures, banks were closed for a while and capital flows within and out of the country were tied to all kinds of conditions, but you can think of all kinds of scenarios.”
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As JPMorgan notes, Greece risks capital controls as it seems unlikely tomorrow’s meetings will solve the nation’s cash crunch. Their base case remains that Greece and the region will find a way to reach an agreement by end June, although the possibility of a “frozen conflict” scenario is growing. In the absence of external support, Greek authorities would likely continue to run up arrears to their suppliers and go into arrears on their payments to the IMF.
Although visibility on the exact liquidity position is low, reports continue to suggest that the Greek authorities’ ability to continue to meet their liabilities is measured in weeks. Indeed, the Greek authorities' plan to allow tax debts to be paid in instalments appears to have been partly designed to encourage payments by the end of March. Despite the intensity of the cash flow pressure, we continue to think that Greece looking to the ECB for a solution via greater T-Bill issuance is simply not going to work. With Draghi having stated that such action would violate the prohibition on monetary financing, that route is effectively closed, and we are surprised that Tsipras continues to pursue it.
So where does this leave us? Our base case has been (and remains) that Greece and the region would find a way to work together and reach an agreement by end June. But the possibility of a “frozen conflict” scenario is growing. That runs as follows. In the absence of new external support, the Greek authorities will likely continue to run up arrears to their suppliers and go into arrears on their payments to the IMF. Our best guess is that, in conjunction with a broader sense that negotiations with the Eurogroup are very difficult, this would trigger renewed deposit outflows and the imposition of capital controls. With capital controls in place and Greece not making payments to either the IMF or the ECB, we could imagine a “frozen conflict” persisting for a number of months. During this perio,d discussions between Greece and the region would continue, but the economy would be hit by intensified uncertainty and the limitations on the ability of the banking system to function. An accommodation between Greece and the rest of the region may then be found. Alternatively, with growth weak and the primary position going into deficit, domestic political pressures within Greece would likely take us toward either a referendum on continued Eurozone membership or new elections.
Even Commissioner Moscovici has stated that the region will not act to keep Greece in the Eurozone “at any price”.
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This is not supposed to happen... Grexit fears spreading across the PIIGS... in bonds...
[11]
and stocks (Spanish and Italian stocks practically unch, Greece monkey-hammered)
[12]
So much for ECB QE compressing risk premia...
Charts: Bloomberg
