***Update:
- SCHAEUBLE: GREECE FREE TO SEEK RUSSIAN AID, MAY NOT GET MUCH
- SCHAEUBLE: GREECE MUST RESPECT ACCORDS TO GET TRANCHE PAYMENT
- SCHAEUBLE: SHOULDN'T EXPECT GREECE PROBLEM SOLUTION IN RIGA
- WEIDMANN SAYS ELA MUST BE TIED TO BANKS IMPROVING LIQUIDITY
“Anybody who says they know what will happen if Greece is pushed out of the euro is deluded”, Greek FinMin Varoufakis told an audience [21] at the Brookings Institute yesterday as the clock ticks and as Greece’s public sector employees wonder if their wages and pensions will be paid in euros or IOUs [22]. “Deluded” though their forecasts may be, that’s not stopping anyone and everyone from attempting to plan for an imminent default and everything that goes with it.
For their part, Bloomberg is out [23] with an “ABC” scenario where “A” has Syriza folding their hand, adopting more austerity, and receiving the next tranche of aid; “B” involves the imposition of capital controls which in turn pushes Greeks to either support full euro membership and the tough choices that come with it or supporting an pseudo-exit which involves a parallel currency (IOUs), defaults, and restructurings; and where “C” is for “‘C’an you believe it? Everything ZH has been warning about it coming true.”
Here’s more:
SCENARIO A -- GREXIT AVOIDED
Faced with a choice between expulsion from the euro area or implementing austerity in exchange for loans, Tsipras takes the cash. The ECB maintains its support of the financial system.
While aid flows, the government’s days are numbered as his most hardline supporters mutiny. A new coalition is formed and backing from pro-European opposition parties keeps Tsipras in office -- or elections are called.
Greece’s membership of the euro is ultimately secured.
SCENARIO B1: SOMERSAULT
The dramatic consequences of capital controls -- limits on withdrawals and transfers -- force Tsipras to compromise. Opinion polls show that most Greeks -- between two-thirds and three-quarters of the population -- want to stay in the euro area “at any cost.”
Tsipras forges a new coalition with opposition lawmakers of pro-European parties. A referendum, carried out amid capital controls and with banks shut, gives him a mandate to reverse course. A unity government is formed and Greece remains in the euro but not before the disruption triggers a new recession.
SCENARIO B2: CHECKING OUT
With banks shut, the political situation deteriorates and a popular uprising intensifies, with Germany targeted as the country’s main antagonist. Polls show a swing in favor of breaking from the euro area.
Capital controls give the government the space and time to print either a new currency or IOUs for domestic payments. The new scrip quickly plunges, reflecting the weak fundamentals of an economy that has shrunk by about a quarter since 2008.
Euro-area governments give Greece a “sweetener,” a loan in hard currency. The rationale is to avert total economic collapse, which would create a failed state in a strategically critical region.
Greece’s debt to public entities is restructured, providing for the repayment of loans to the IMF, either through the euro area’s crisis fund or from the departure credit. Greece remains shut out of debt markets.
Most Greek companies and banks default. Some bank deposits are seized to recapitalize a shattered financial system...
The new paper and the euro both circulate. Greece hasn’t officially left the euro zone -- the door is open to a return in good standing...
SCENARIO C -- ‘C’ FOR CATASTROPHE
Greece separates from the euro area in a messy default, amid demonstrations, deepening misery for most and the government blaming everything on the Germans.
No help is provided to support a new currency and to keep servicing bonds and IMF debt. That triggers cross-default clauses to all creditors. The government and banks collapse, meaning that years will be needed before a new structure emerges.
Greece’s economy plunges into a second depression. The blow from the biggest default in the history of capitalism drives Europe back into a recession and heaps pressure on vulnerable euro countries such as Italy.
Bad blood leads to Greece’s departure from the European Union. The idea that the euro is irreversible is thrown into question, rattling global markets.
The economic implosion paves the way for extremists, from either the left or the far right, to take power. Those who can, flee the country.
The tumult casts doubt on Greek membership in NATO. A new - - and unstable -- government turns to Russia for support, providing a Mediterranean outpost for Vladimir Putin.
Meanwhile, BofAML is keen to note that this may be one time where an eleventh hour agreement won’t be enough to save the situation:
Parkinson’s law states that “work expands so as to fill the time available for its completion”. In the context of Greece that can be interpreted as the negotiations continuing up until the deadline. In Europe there always seems to be a deadline after the deadline, turning Parkinson’s law into eternal procrastination. However, the likely deterioration of Greece’s cash flow position at month-end and through early May should accelerate proceedings, in our view…
It seems increasingly unlikely that the Eurogroup of April 24 will achieve an agreement on Greece. In Greece: the challenges ahead we argued that to avoid extreme scenarios Greece needs a Eurogroup agreement as soon as possible, an approval of this agreement in the Greek Parliament and a solution to cover short-term funding needs. Headlines from the IMF meetings suggest that the European authorities do not expect an agreement on April 24, but hope to achieve more progress by the Eurogroup of May 11.
We will be concerned if we don’t see any progress on Greece in next week’s Eurogroup. The government’s cash buffers are very limited. Press reports in Greece suggest that the general government’s cash buffers are €2.5bn to €3.5bn. Not all of it is available, as it is with state entities that are independent and have their own rules and decision processes. If the government is unable to access any of these funds, then Greece may face the risk of an internal default as early as the end of April, or the risk of missing a payment to the IMF in early May. Even if the government can access all these funds—which is very unlikely in our view— the government may be unable to meet its internal spending obligations by the end of May. Therefore, without a Eurogroup deal and new official loans, we expect Greece to miss internal and external payments sometime in May, which will lead to an official default in June
Here’s a look at everything coming due over the next several months. This includes internal payments due to public sector employees, T-bill rolls, and external creditor payments:
[24]
As we’ve seen over the last 48 or so hours (i.e. since reports surfaced that Germany was preparing contingency plans [25] and that the Greek government had floated the idea of shuffling its payment schedule with the IMF), contagion risk in the form of widening periphery spreads appears to be back on the table.
Here’s Barclays on contagion...
We continue to think that the direct costs of a Greek default and exit appear manageable but contagion would create near-term stress in risky assets, especially in fragile periphery economies such as Portugal, Spain and Italy, even if a Greek exit did not lead to a break-up of EMU. Yet a Greek exit would certainly set a precedent, changing the fundamental nature of the monetary union to one in which “exiting” would become a distinct possibility. Every time a euro area country encountered solvency or political risks, the markets would be on high alert, even if these were not near-term risks.
And as we’ve reported on dozens of occasions, the country’s public sector financial situation is dire as Athens faces the absurd proposition of paying employees in IOUs which would eventually be returned in the form of tax payments further bankrupting the government…
...and on public finance...
With no new official funding received since the summer of 2014, it’s no surprise, in our view, that the Greek authorities have been struggling to meet payments since early 2015. Press reports (Bloomberg, Reuters, Ekathimerini) indicate that the central government has been increasing the use of arrears and has tapped unused cash reserves in various public state bodies (from state-owned companies, social security funds, etc). Furthermore, the central bank reportedly stepped in via a government-held account to avoid an unsuccessful t-bill auction, while the €2.7bn shortfall in the 2014 primary surplus was reportedly paid for out of general government liquidity reserves, putting further strain on the state’s liquidity position.
It also appears that other nations have moved into preservation mode as Kathimerini reports the central banks of several countries which have a large Greek banking presence are looking to rein in their exposure to Greek risk via a veritable quarantine [26] presaging a precarious situation ahead.
...and on bank runs and capital controls...
The risks of a liquidity accident remain high. One possible transmission channel could be an acceleration of deposit outflows into a bank run, most likely triggered by a disagreement between the institutions and the Greek government on key policy issues, a default on a payment or as a result of a political crisis within the Greek government. The acceleration of a bank run would in all likelihood require some form of capital controls to stem the deposit outflows. To be clear, we are not of the view that such controls can be imposed pre-emptively by the Bank of Greece, but rather as a consequence of a negative shock that ends with an acceleration in deposit outflows. We do not think that the government will decide unilaterally to default on its international commitments. Instead, we believe, that a default would more likely be the consequence of the government’s inability to agree with the institutions, or the possibility of a new programme veering off track again, rather than a pre-emptive strategic decision (even if this possibility cannot be ruled out either). In turn, a default would trigger the imposition of capital controls.
Finally, here’s Goldman on contagion:
As the Greek situation has turned more confrontational, the correlation between Greece’s sovereign risk with that of EMU peripheral markets has picked up again. To measure the degree of spill-over, we use a dynamic conditional correlation approach, which allows for the co-movement in asset prices to vary over time. Using data up to yesterday’s close, we note that the daily correlation between Italian/Spanish 10-year bond yields and their Greek counterparts, which had fallen since the announcement of QE, has picked up slightly. At around 20%, it is around 40% lower than its average since April 2012. Among the EMU peripheral countries, Portugal appears to be the most exposed market to developments in Greece. Its correlation is 50% higher than that of Spain and Italy, and it is now only 20% lower than the average since 2012. The yield change correlation between Spain and Italy and the core (Germany/France) has also become less positive – an indication that bond returns in these two large peripherals are being affected by a credit component, rather than duration alone.
* * *
That is where the situation stands at present although we’re sure the hits will keep coming in terms of rhetoric, posturing, and brinksmanship on the part of both Athens and its creditors. In the mean time, Greeks have once again taken to the streets [27] to express their discontent with living in a perpetual state of uncertainty, and as history makes clear, a desperate populace has the potential to spawn decisively undesirable political movements and outcomes.
For anyone who still doubts whether the possibility of Grexit is real, recall that, as we reported yesterday, all bets are now literally off [28].
