Over the weekend, the situation in Greece escalated quickly after PM Alexis Tsipras took the dramatic step of calling for a referendum [12] in a televised speech to the nation shortly after midnight on Saturday. Shortly thereafter, Greeks were lined up at ATMs. The outlook deteriorated further at a meeting of EU finance ministers on Saturday and by Sunday evening, the ATM lines had grown and Greeks began to stock up on food and fuel ahead of a week-long bank holiday, the closure of the Greek stock market, and the imposition of capital controls.
Global equities plunged on Monday as both carbon-based traders and HFTs tried in vain to keep their composure [13] which watching in horror as Greece, the birthplace of Western civilization, quickly became Venezuela. With Europe’s “Lehman weekend” now in the books and as the currency union stares into an uncertain future, the sellside tries to make sense of it all. Here’s a sampling of reactions and predictions.
From Morgan Stanley:
We don’t see any good outcome from the referendum: Even if it’s a ‘yes’, the current government could be in jeopardy and a period of political limbo might follow, while its credibility with the creditor institutions remains at rock-bottom.
[Capital controls] make what happens over the medium term more binary: either capital controls are lifted, or Greece slides towards euro exit. We think that there’s a 60% probability of Grexit taking a 12-18-month view (up from 45% previously). There’s also a high probability of missing the IMF payment on June 30, which is also when the current bailout expires. And the chances are that Greece will struggle to make further payments too. We estimate a cash shortfall of €22 billion from now to year-end.
The ‘impossible trinity’ – which leg has to give? Staying in the currency union, being in power and not doing what it takes to keep euro membership (e.g., undoing the bailout) is an ‘impossible trinity’ for Syriza, in our view. That’s inconsistent, so one of these three has to give. Mounting economic and financial pressure in theory would suggest that Syriza compromises (in practice, this is not the case) as it would prefer that Greece stays in the EMU and, given the choice, would prefer not to default on the official creditors. But Syriza’s platform has to do with undoing the bailout programme, which is how it came into power in the first place.
[14]
And here’s Citi’s take:
We expect the referendum to result in a comfortable majority for the ‘Yes’ camp, and expect no Grexit this year and a lower risk of Grexit in subsequent years. Either a belated extension of the European programme (expiring on 30 June) or a new interim programme, to take us close to the end of the year, would be negotiated in our view. If the Greek authorities comply with the terms of this extension or interim programme, this could set the scene for a new one-year or even multi-year programme after the end of 2015. Given the track record of the Greek authorities on the structural reform front, however, it is likely that disagreements and tensions between the institutions and the Greek government could flare up again soon. A rerun of the scenario since the beginning of 2015 is therefore possible.
With a ‘No’ vote or an unconvincing ‘Yes’ vote, it is hard to see how a government willing and able to implement anything like the latest proposals of the institutions could be in place for the rest of this year. Unless there is a change of government in Greece (or a major change of views among the institutions), the slide into Grexit would be very likely, even though it might take a long time.
Meanwhile, Barclays says a ‘no’ vote would trigger social unrest, a “forced currency conversion”, and, worst of all for the troika, the re-emergence of redenomination risk in the periphery:
After having likely missed the IMF payment, Greece would default on ECB bonds also. This is likely to be accompanied by significant street demonstrations, triggered by the tightening of capital controls, and a quick further worsening of the economy and may lead to the PM/party stepping down. As we discussed in Greece: the risk of capital controls, without the support of a programme, a potential exit scenario would resemble Argentina’s 2001-02 crisis, which also started with deposit controls but, in the absence of an internationally supported plan, rapidly deteriorated into tighter controls and a forced currency conversion. We believe that European institutions would need to respond to this scenario with a strong institutional reform agenda, otherwise redenomination risk could re-emerge.
Finally, RBC has more on what happens when the IMF payment is missed tomorrow:
The IMF payment will (most likely) be missed. It seems very unlikely that the Greek authorities can or want to pay the €1.6bn due to the IMF on 30 June. There have been extensive debates about what this technically means and whether that constitutes a default. On the IMF itself, this is not 100% clear. IMF managing director Lagarde said in a previous comment that the IMF would not apply any grace periods and would consider Greece to be in arrears straight away. Given the acrimonious deliberations and this weekend’s developments this seems possible. On the other hand, the IMF could also apply a four-week grace period before declaring a state of default (see Exhibit 2). If it opted to do so, this could be bridging the time until after the referendum. We actually think that this is a distinct probability.
[15]
There is some leeway on the EFSF’s side on whether or not to effectively put Greece into a default on their loans as well if the IMF has declared default. With bond redemptions not due immediately, it seems unlikely that such a call would be made. Furthermore, as we also elaborated in the aforementioned research note, we do not expect any negative fall-out on the EFSF’s ratings either – although the market reaction should clearly be negative (see below). Also important is whether any of the private sector bonds are being affected particularly the post PSI bonds that are predominantly held by Greek banks and should thus have a significant impact on the banks' balance sheet health. According to the prospectus, the post PSI bonds rank paris passu amongst themselves and with all unsecured and unsubordinated borrowed money of the Republic. This means a default of EFSF loans and/or ECB held pre-PSI bonds should trigger a default of the post-PSI bonds. Thus, the non-IMF payment should not automatically lead to this outcome whereas a nonpayment of the ECB held bonds should. Thus the 'real' deadline for the Greek banking system should be the first private sector debt repayment (a JPY bond due on 14-July) and then the ECB held bond maturities (20 July) - if the banking system can be maintained for that long.
To call this a "pivotal" week would obviously be an understatement. The next few days will present EGB markets with their toughest test since the summer of 2012 when Spain and Italy were nearly priced out of the market. Central bank omnipotence and heretofore resilient Western equity markets will undergo similar trials by fire, while in Greece, the situation on the ground looks to be deteriorating quite rapidly, with the world watching incredulous as lines form at gas stations and grocery stores ahead of what is effectively a popular vote on whether the country will chance an economic collapse in order to preserve the right to govern itself.
Stay tuned, and as always, trade accordingly.
