As “difficult” negotiations between Greece and its creditors drag on, Athens is perilously close to running completely out of cash, and with the banking sector becoming ever more reliant on incremental increases in the ELA ceiling, it may be time to start considering what happens if the cash-strapped Syriza government can’t “borrow” enough public sector funds or otherwise find the money to meet its obligations over the next several months. As a reminder, here’s what the country is up against in the near-term:
If you believe the government (and why wouldn’t you?), Greece will make a scheduled payment to the IMF on April 9 and should have enough cash to carry it through the month. That said, BofAML thinks it’s time to consider the “negative scenarios” that would play out in the event Athens finally comes up short.
If Greece misses the payment to the IMF on 9-Apr, this would not necessarily trigger an immediate default. Greece may have an implicit grace period of one month. 1 The sequence of events would be as follows: 1) IMF Staff immediately sends a cable urging the member to make the payment promptly; this communication is followed up through the office of the concerned Executive Director. The member is not permitted any use of the Fund’s resources, nor is any request for the use of Fund resources placed before the Executive Board until the arrears are cleared; 2) After 2 weeks, management sends a communication to the Governor for the member, stressing the seriousness of the failure to meet obligations and urging full and prompt settlement, and 3) After 1 month, the Managing Director notifies the Executive Board that an obligation is overdue.
It is once the Executive Board has been notified of the missed payment that a critical sequence of events could unfold. According to the master financial assistance facility agreement between the EFSF and Greece, the notification of an overdue payment to the IMF would constitute an event of default for the EFSF loans. Such a scenario would risk the EFSF cancelling all or part of its facility, or even declaring the principal amount of the loan to be due immediately. In turn, the acceleration of EFSF loans linked to the PSI exchange would trigger a default event for the PSI GGBs. Even if Greece repays the IMF loan of €458mln on April 9, note that they also have to repay €200mln on May 1 and €763mln on May 12.
Same applies to ECB interest due. Greece also has to pay €274mln of interest on GGBs in April. Assuming it pays €194mln interest to private bondholders on 17-Apr, it will be left with the €80mln interest payment due to the ECB on 20-Apr. The prospectus of the bond held by the ECB indicates a 30-day grace period on interest payments, before a default is declared. Note that this is also the case for the privately held PSI GGBs.
So a missed payment this month triggers a default next month, and at that juncture the following creditors can refer to the ECB’s own projections to determine the likely value of their holdings: “the value of Greek government debt - currently around € 320 billion - in the event of a sudden, 'accident-like' Farewell to the Greeks from the Euro-zone ("Graccident") shrink to around 5 percent of the principal amount.”
Meanwhile, Greece will need to roll over some €1.4 billion in t-bills in two weeks, something which Commerzbank suggests the market should "not ignore" because without access to bailout funds, bill auctions represent a substantial "event risk" for Athens. Furthermore, whatever foreign demand there might have been is likely to dissipate in lockstep with any deterioration in the prospects for a deal with creditors.
Greece may announce tomorrow that its next t-bill auction will take place on April 8, before the IMF payment scheduled for April 9 (April 10 and April 13 are holidays in Greece).
Primary mkt activity is an event risk for Greece because it’s unlikely that any bailout money will flow over coming days.
Greece will have to roll over EU1.4b of 26-week GTB maturing on April 14 and also EU1b 13-week GTB maturing on April 17.
April 14 GTB rollover may well be more difficult than April 17 one as foreigners probably have more exposure in that line as it was sold in early Oct., before meltdown in GGBs triggered by prospect of snap elections.
This time, it’s unlikely foreigners will roll over their complete exposure, leaving net supply to be taken down by Greek domestic institutions.
Together with fears that any net GTB supply to been absorbed by domestics will be a big challenge, this should trigger more pressure on Greece.
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And speaking of April 9, that is the day that the country has told Eurozone officials it will officially run out of cash according to Reuters.
Coincidentally, it's also the day Tsipras will be in Moscow to discuss "international developments" with President Putin.