When everyone begins to draw up the contingency plans you know the end may well be nigh.
Just two days ago FT reported that the Greek government — which has reportedly resorted to “acting like a taxi driver [11]” when it comes to asking for money from creditors — has “come to the end of road [12]” and is prepared to declare a default on its debt to the IMF (so no gas for Kiev?) if no agreement is struck between Syriza and the people who are not to be called “the troika” by the end of this month. Of course, Athens denied the “rumor,” without explaining how it planned to find enough money to make good on its obligations coming due in May.
As FT noted, “a default would almost certainly lead to the suspension of emergency European Central Bank liquidity assistance for the Greek financial sector, the closure of Greek banks, capital controls and wider economic instability.” Couple this with unpaid pensions and salaries and you have the recipe for what we’ll call a “domestic issue” and by that we mean a popular uprising. In what may be an early attempt to head off (or at least ameliorate) such a scenario, Germany is reportedly prepping a plan to support Greek banks in the event Greece does in fact take the plunge.
From Die Zeit [13] (via Google translate):
[Berlin] is working on a plan that would allow it to keep Greece in the case of a sovereign default in the euro. According to information from the TIME fears the coalition in Berlin that the government in Athens in one of its payment obligations possibly coming weeks can not meet. In such a case, the European Central Bank (ECB) would have to stop supplying the country with the euro.
Last week, Greece could barely afford a due payment to the International Monetary Fund (IMF). The now-discussed plan aims to enable the ECB to finance Greece in case of a failure further . For this, the Greek banks would be restored to the extent that they can participate in the financial transactions of the central bank even after a bankruptcy.
All of this would be contingent upon Greece adopting a more conciliatory (and less taxi driver-ish) approach to reforms — we think it’s fair to say that the chances of that are rather slim. In the event Athens isn’t amenable to the plan, Zeit suggests the eurozone will then “facilitate” the transition to the drachma.
Prerequisite for such a concession is but how it is said that Greece are cooperatively show and was ready to meet the reform requirements. If this is not the case, will take a secession from the monetary union in buying the federal government. Even then Greece will but as far as possible be tied to Europe - through aid flows from Brussels to facilitate the transition to its own currency.
The German government has declined comment.
As a reminder, UBS raised the probability of a Greek default to 50-60% in an April 2 note which also featured this rather troublesome outlook:
The recent pace of progress is disappointing, so that we need to increase the exit risk probability from 10-20% to 20-30%. In addition, the risk of capital controls is substantial because a default would accelerate deposit flight.
And from a more recent note:
The country’s cash reserves are running low and are likely insufficient to meet obligations falling due in May which means the pressure on Greece will mount over the next couple of weeks before the Eurogroup meeting on April 24th. A failure to agree a final list of reforms and prolonged withholding of bailout funds as a result would be a very negative outcome for Greece.
Meanwhile, Greek banks are still hanging on thanks to incremental ELA increases even as talks are still deadlocked and the IMF "can't rule out" a destabilizing tail event. Via Bloomberg:
- Talks on resolving Greece’s financial deadlock resume today
- As negotiations for Greek economic reforms drag on, a further “crisis” that would unsettle financial markets can’t be ruled out, IMF says
- Greece won access to more emergency cash for its banks; ECB raises the cap on Emergency Liquidity Assistance by EUR 800m to EUR 74b
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As for GGBs, well, let's just say they are pricing in a bit of risk as yields climb to their highest levels since April of 2013:
