Shape Of Greek Endgame Emerges: IMF Discussed "Cyprus-Like" Plan After Tsipras Warned Of Looming Default

As we said over the weekend, it’s all about Riga again for Greece. EU leaders will meet on Thursday and Friday in Latvia where PM Alexis Tsipras will try to secure a more favorable outcome than did FinMin Yanis Varoufakis who, last month in Riga, reportedly did more chiding and lecturing than negotiating, a performance that may ultimately cost him his job once all is said and done. The situation is far more urgent this time around, with Greece having tapped its IMF SDR account to make a payment to the Fund and with the banking sector running dangerously low on collateral that can be pledged for emergency liquidity.

A bit more color from Deutsche Bank:

One thing that is starting to come to a head is Greece. With an EU leaders summit in Riga scheduled for Thursday and Friday, we should have a good idea of where current negotiations stand by the end of the week. Talks may well pick up in pace over the next few days with a spokesman for the Syriza party saying on Greek TV (Mega) that ‘we’re striving for a mutually beneficial agreement by Friday’ while pushing the party line that ‘our mandate from the Greek people is to reach an agreement where we stay in the euro area without harsh austerity measures’...

 

One other factor that will likely add pressure to accelerate negotiations this week is the news over the weekend that Greece came close to being unable to pay the May 12th IMF repayment. According to Greek press Ekathimerini, PM Tsipras sent a letter on May 8th to the IMF’s Lagarde saying that the Greek government would not be able to repay the €750m unless the ECB allowed for Greece to issue more T-Bills. In the end, the government decided that it would only be able to repay after it emerged that Greece could use €650m of Special Drawing Rights issued by the IMF (and in turn exhaust their reserves). Since this, another memo sent by the IMF and reported by the UK’s Channel 4 on Saturday has suggested that Greece will be unable to make the IMF payment due June 5th unless a release of funds is achieved (this marks the next significant payment date). 

More details have indeed emerged about Tsipras’ recent dealings with the IMF. As it turns out, Tsipras sent a letter to Christine Legarde early this month warning her that no payment would be forthcoming on May 12 without some manner of lifeline from EU creditors. Here’s more via FT:

Greece came so close to defaulting on last week’s €750m International Monetary Fund repayment that the prime minister warned IMF chief Christine Lagarde he could not pay it without EU aid.

 

Athens ultimately made the payment without financial assistance from the bloc but only by tapping a rarely used emergency account Greece holds at the fund — an unorthodox transaction that amounted to borrowing IMF funds to pay the IMF.

 

Alexis Tsipras wrote to Ms Lagarde, warning that the IMF repayment would be missed unless the European Central Bank immediately raised its curbs on Greece’s ability to issue short-term debt.

 

The letter, first reported by the Greek daily Kathimerini but independently confirmed by the Financial Times, raises questions about how close Athens is to bankruptcy. In addition to payments due to the IMF next month totalling €1.5bn, the Greek government has struggled to meet its wage and pension bills, which must be paid at the end of the month…

Varoufakis, Bloomberg reports, was tipped about the SDR option on a trip to Washington last month:

Greek Finance Minister Yanis Varoufakis had been told about possibility of using IMF SDR holding account on visit to Washington in April, govt still needed permission from IMF before could use it to make May 12 IMF payment, Greek govt spokesman Gabriel Sakellaridis tells reporters.

As far as pensions are concerned, Greece says it will pay government employees in May.

  • GREECE WILL PAY SALARIES, PENSIONS AT END OF MONTH: SPOKESMAN

Assuming the government makes good on that promise, it will quickly run up against another IMF payment on June 5 and as noted above, Athens will default if no deal has been struck by then. The following graphs show government revenues, government spending, and the payment schedule and demonstrate quite clearly why the situation is so urgent:

Here’s Bloomberg’s assessment of the fiscal situation:

How long can Greece carry on? With revenues just about covering the pay and pensions bill, there’s not much left over to make even the small(ish) payments due to the IMF in June. If Greece and its banking sector can limp a little further, the state should get a boost from income tax receipts that usually flow in July. Unfortunately, that might come too late to pay the ECB 3.5 billion euros due on July 20, and the repayment that follows in August looks like an impossible challenge without a disbursement of Eurogroup funds…

 

Should Greece’s citizens begin to lose faith in a positive outcome to negotiations, it’s quite possible that receipts could falter as more of the usual tax payments are held back and taxable activity is curtailed. Still, some boost to the Treasury’s bank balance is likely in July. General government revenues could be lifted by about 3.8 billion euros compared with the average for the other months of the year. That would get some way towards the figure needed to pay the ECB, though it might not come soon enough to avoid a missed payment…

 

Of course, making it as far as July depends on how long the Greek banking sector can survive. Absent a change to the haircut imposed by the ECB on Greek banks’ collateral, limitations on emergency liquidity assistance are unlikely to pose serious constraints before mid-July. Greek banks have enough collateral to access 93 billion euros in liquidity. That's 13 billion euros above the current cap. The four-week average of increases by the ECB stands at 1.5 billion. At the current pace of increase, Greek banks could keep borrowing more for about eight weeks to offset deposit flight.

But the idea that the ECB will continue to prop up the Greek banking sector is becoming more tenuous as Mario Draghi recently came under fire from Bundesbank chief Jens Weidmann who openly accused the central bank of breaking the monetary financing taboo. Rumors that the ECB will soon begin to tighten the screws by raising the haircut on collateral pledged for cash have been making the rounds for weeks and as Bloomberg warns, the move could come at anytime:

A crunch will come if the ECB increases the haircut on Greek collateral to levels not seen since last year. That could be prompted by anything from a complete breakdown in talks to a missed debt payment, the official said. A continuation of the current impasse could even be all that’s needed, the official said.

 

While talks are centering on whether to give Greece more money, the ECB could raise the stakes if it increases the discount on the collateral Greek banks pledge in exchange for cash under its Emergency Liquidity Assistance program. That could happen as soon as this week, after the Governing Council next meets in Frankfurt on May 20.

Meanwhile, Commerzbank doesn’t seem to buy the idea that the equivalent of a DIP loan would be sufficient to keep Greece from collapsing in the event Grexit becomes a reality:

Greece probably has no choice but to leave the euro if it defaults as it would likely be unable to source the funds needed to recapitalize its banks, Commerzbank chief economist Joerg Kraemer writes in client note.

 

If the country were to default, the banks’ claims on the state would be essentially worthless and they wouldn’t be allowed access to new money through the ELA.

 

Only a fraction of the equity capital needed could be gained from Greek bank bond creditors.

 

A recourse to bank deposits may also yield little as most accounts are probably under the threshold of EU100k per person which would be spared in any restructuring.

As you can see, the bail-in hints are starting to be dropped, suggesting that in the final analysis, some Greeks may be Cyprus’d. Indeed, the IMF has already discussed this possibility behind closed doors. Here’s FT again:

According to two officials briefed on the talks, at least one board member raised the possibility of presenting a “take it or leave it proposal” to Greece…

 

The idea of a “Cyprus-like” presentation to Greek authorities has gained traction among some eurozone finance ministers, according to one official involved in the talks.

As for Greek officials, they’ve become quite adept at wholesale denials:

There should be a solution in May so we can resolve our liquidity issues," Gabriel Sakellaridis told a news conference.

 

He ruled out a levy on bank deposits to raise cash and said the government would not sign a third bailout program.

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Touch Capital Markets’ Andreas Koutras summed up the situation nicely when he gave Bloomberg his best Schaeuble impression: 

“There were too many people crying wolf before. But as Hemingway wrote: How did you go bankrupt? Two ways: Gradually, then suddenly.”