Germany Gives Greece Grexit Referendum Greenlight

Headline risk surrounding Greece will likely weigh heavily on investors’ minds throughout the week as Syriza faces one of its biggest tests yet when a €750 million payment to the IMF comes due on Tuesday. Despite rampant skepticism and a warning from Germany’s Schaeuble that countries can “accidentally” become insolvent, FinMin Varoufakis claims Greece will make the payment and thus avert an imminent default. This comes as finance ministers from across the currency bloc meet to discuss Greece’s future with the consensus being that there almost certainly will be no definitive deal on Monday, but there look to be conflicting reports as to whether an interim solution to address the country’s immediate liquidity needs can be fashioned. 

Via Reuters:

A 750 million euro debt repayment to the IMF falls due on Tuesday but Varoufakis said a deal that would provide some liquidity relief for Greece was more likely in the coming days…


Euro zone officials have ruled out a deal with Greece at Monday's meeting and said any statement they make is unlikely to be enough to allow the European Central Bank to raise the limit on short-term Treasury bills that Greek banks can buy - a move Athens has sought as a way to avert a national bankruptcy.


In a sign of growing pressures within the ruling Syriza party against backing down to lenders, the parliament speaker Nikos Filis suggested on Monday that the IMF debt repayment would depend on the Eurogroup outcome…

The stance of Filis, a hardliner within Syriza, is different from that of the government, which says it will make the payment on Tuesday.


"It is clear that any move by one side affects the other side. The next moves will be shaped by today's developments, we are seeking an agreement," Filis told Mega TV.


"The decision (on the IMF repayment) will be taken today. It depends on the Eurogroup," he said. 

Regardless of whether some stopgap measure is found for tomorrow’s IMF payment, Athens faces five more payments to the IMF over the course of the next two months, and given the seemingly intractable character of the negotiations, it’s worth considering what happens in the event of an “accident”. Barclays has taken a look at the country’s liability stack to determine where there is potential for cross-acceleration of payment rights.

In other words: assuming Greece defaults on an obligation to a given creditor, what are the implications for other creditors in terms of their right to demand immediate payment? Below is a matrix which outlines the universe of possibilities.

For their part, UBS is out with “four scenarios for Greece and the Eurozone.” Here’s more:

Scenario 1: Eventually positive outcome, default and Grexit avoided Under this scenario, the negotiations between Greece and the Troika remain protracted, but they will eventually make sufficient progress for the Troika to sign off the conclusion of the stalled fifth review. This would lead to the payout of €7.2bn, but parts of the disbursement (for example the ECB's €1.9bn in SMP profits on Greek bonds) might be paid out earlier (for example, after reformrelated legislation had been passed by the Greek parliament) in order to help the Greek government to avoid a default in May/June…


The key to a breakthrough would be that the Greek government, amid increasingly precarious public finances and ongoing deposit outflows from the banking sector, would eventually be forced to make more comprehensive concessions in crucial areas of structural reform, such as pension and labour market reform, taxation, and privatisation – measures that would go against vested interests in Greece. In return, to soften the political resistance to these measures and allow for somewhat greater social spending, the Troika would allow the Syriza government to run a lower than previously targeted primary surplus…


Scenario 2: Default, but no Grexit Under this scenario, negotiations would continue to proceed very slowly, with the Syriza government remaining reluctant to give in to Troika demands related to unpopular structural reforms and fiscal targets. Amid an increasingly difficult budget situation, the government's ability to service its debt while at the same time paying wages and pensions would decline further and the government would eventually default on (parts of) its debt.4 In the event of a default, the risk of Grexit would clearly rise, but it would not be inevitable. In our view, it would depend crucially on: 

  • what sort of debt the government would default on; 
  • whether this would trigger cross-default on other debt; 
  • how the default would affect the stability of the Greek banking system; 
  • how the ECB would react to a default; and 
  • how long the default would last

And as we argued yesterday, the ECB’s handling of an adverse scenario will prove crucial:

A crucial question would then be how the ECB would react. As we argued above, the ECB's rules on the provision of Emergency Liquidity Assistance (ELA) are neither detailed nor very transparent; and although they clearly stipulate that ELA can only be provided to solvent financial institutions, the ECB would probably have some room to exercise judgement and discretion. We would regard it as likely that the ECB would at least tighten the collateral requirement (haircut) it applies on ELA. However, the ECB might not necessarily cut off ELA immediately, particularly if negotiations between the Greek government and the Troika were still ongoing and a positive eventual outcome were still conceivable. (In the case of Cyprus in late 2012/early 2013 the ECB continued to provide ELA despite widespread concerns about the solvency of the Cypriot banking system.)


Scenario 3: Default, quick Grexit Should Greece fail to strike a deal with its international creditors over the coming months, the fiscal situation would deteriorate so far that a default might become inevitable; this could happen as early as May or June, but the risk would certainly rise dramatically in July and August. Default would seriously worsen the situation of the Greek banks, given losses on their bond/T-bill exposure, a reduction in eligible collateral for ELA operations, and likely deposit runs. If an official, political understanding is reached at the European level that talks have finally collapsed – a crucial difference towards Scenario 2 – the ECB would not be able to "pretend and extend", but would have to cut off ELA to Greek banks. The Greek government would be forced to impose capital controls, but the liquidity situation of the banking sector would nevertheless worsen so dramatically that, in order to avoid a collapse of the banking system, the government would have no choice but to introduce its own currency. The launch of a "New Drachma" would be a huge logistical challenge.


Scenario 4: IOUs to become a parallel currency, eventual default, Grexit Under this scenario, the increasingly desperate budget situation would force the Greek government to issue IOUs for domestic payments. By now the government might have already started to pay corporate suppliers using IOUs of some sort (as happened in Greece and other peripheral countries earlier in the Eurozone crisis), but the approach could be formalised much more and extended to public sector salaries and pensions, which make up a large part of public spending. 

Here’s a probability distribution…

...and here’s a look at what GGBs are saying about the risk of Grexit

As you can see from the above, the notion of a "parallel currency" (which is a polite name for an IOU issued by the Greek government) is increasingly seen as a very real possibility and could have dire consequences for the monetary union because as we've noted in the past, it is redenomination risk that threatens to break the euro, not spiking periphery spreads. Put more simply: If there is a Greek default and suddenly it becomes clear to everyone that the unbreakable monetary union is quite, well, breakable, the IMF will have to worry not about bank runs in Bulgaria et al, but the countries in Europe's periphery. Consider the following as well which underscores the degree to which a return to the drachma is under serious consideration (via Bloomberg):

Ex-Deutsche Bank Chief Economist Thomas Mayer discussed his proposal for a parallel currency with Greek Finance Minister Yanis Varoufakis and Prime Minister Alexis Tsipras at April 28 meeting in Athens, Handelsblatt reports, citing Mayer.


Mayer’s proposal from 2012 gaining traction as ECB, IMF also considering scenarios whereby pensions, government workers could be paid in IOUs: Handelsblatt, citing unidentified German govt official.

Meanwhile, Germany has suggested that Greece should consider letting its citizens decide if they are prepared to dial back their anti-austerity expectations in exchange for funding that would keep the country in the euro and avert a catastrophic default. 

Via WSJ:

A referendum in Greece on the country’s international bailout program may be a good idea, Germany’s finance minister said Monday.


“It may even be a right measure to ask the Greek people to decide whether it’s ready to accept what is necessary or whether it wants the alternative,”said Wolfgang Schäuble said as he arrived for a meeting with his eurozone counterparts in Brussels.


Calling a referendum on the bailout would be a risky move for both the government in Athens and the rest of the eurozone, adding further unpredictability to a tense situation. A negative vote would likely herald Greece’s exit from the eurozone.


Several of the overhaul measures demanded by Greece’s international creditors—including pension cuts and new laws that make it easier to lay off workers—clash with the promises the new left-wing government made when it was elected in January.


The last time a Greek government proposed a referendum on its bailout—in 2011—the idea was vehemently opposed by German Chancellor Angela Merkel. Her opposition pushed the then-government to scrap the plan.

Of course, as we've noted on several occasions, Greeks aren't keen on the referendum idea even as they prefer, on balance, to remain in the euro. 

Via Protothema:

A day after Greek Radical Left Coalition (SYRIZA) Prime Minister Alexis Tsipras overhauled his negotiating team in an effort to speed up debt talks and unlock bailout funds benchmarked for Greece, the prime minister said he might resort to calling a public referendum on any deal with international creditors. He said that a package that goes beyond the political mandate that resulted in his party’s victory on January 25 could result in a referendum.


Citizens polled by Marc for private ALPHA TV and by GPO for private MEGA TV state that Greeks do not want to go to the polls on the issue.


GPO saw that a resounding “No” to a referendum is given by 62% of Greeks. 

Or, summing up: