As the farcical negotiations between Greece and its creditors unfold ahead of a June 5 IMF payment and as Alexis Tsipras is forced to spread false hope just to avoid a terminal bank run, a picture of the Greek endgame has emerged.
We’ve discussed the political implications of both an agreement or a Grexit and we’ve also taken an in-depth look at what a missed IMF payment means for the country’s EU creditors. On the political front, the troika is intent on sending a strong message to leftist political parties (such as Spain’s Podemos and Portugal’s “ascendant" socialists) that using the threat of a euro exit as a way to extract austerity concessions is not a viable negotiating strategy. What this amounts to is an attempt on the part of the “institutions” to subjugate the political process to economics. In terms of skipping a payment to the IMF — who, as a reminder, effectively paid itself earlier this month by allowing Greece to tap its SDR reserves to pay the bills — there are a number of cross acceleration concerns which you can review by referring to the following graphic:
Now, amid accelerating deposit outflows and an hourly flow of conflicting headlines, Deutsche Bank is out with a fresh take on the Greek endgame including an analysis of both the political wrangling that would need to take place in order for parliamentary approval of concessions to creditors and the mechanics of a default to the IMF.
Via Deutsche Bank:
Little has changed in terms of developments on the ground. Despite a number of reports that negotiations may be split into separate chapters and disbursements with more difficult issues left for September, this remains unlikely. The consistent European position has been that a full staff-level agreement between the institutions - inclusive of the IMF - and Greece is required to unlock funding. Talks in this direction has been progressing in stop-start fashion over the last few weeks, with the Brussels Group (former Troika) reconvening again yesterday to continue negotiations. But progress remains slow, with multiple European and IMF officials over the last twenty four hours stating that more needs to be done to reach agreement…
The Greek government's liquidity position will ultimately drive the timelines over the next few weeks. Close to 1.5bn EUR is due to the IMF in four instalments over the course of June, with Greek government officials repeatedly stating that there are insufficient cash buffers to satisfy these payments. Given that the last IMF payment was made by drawing down Greece's SDR reserves at the fund, an exhaustion of cash buffers is a fair assumption. The most likely catalyst in coming weeks is therefore likely to be the Greek government's ability or not to pay the IMF...
A number of press reports have suggested that there is a one-month grace period relating to a failure to pay the IMF. This likely confuses two issues: a non-payment and the implications this has on cross-default provisions on other loan instruments. IMF loans do not include any formally defined grace period, with fund staff required to send an urgent cable demanding payment to the Greek authorities immediately. This is then followed by a formal notification by the IMF Managing Director to the Executive Board of the failure to pay. It is this notification that is defined as an event of default in Greece's EFSF and other official-sector loans, triggering cross-default. If this materializes, European creditors then have the right (but not the obligation), to accelerate EFSF loans, causing them to be immediately payable. In turn such an acceleration event would trigger cross-default and potential acceleration in the post-PSI Greek government bonds. The timing of the IMF notification letter is itself a political decision, however, as is the decision to accelerate EFSF loans. IMF guidelines suggest the notification to the board happens in a month. Our understanding is that the notification period may be flexible, with some reports last week suggesting that the Executive Board has requested that this notification happens sooner in the event of a failure to pay from Greece.
Either way, it is important to note that it is not the response of the IMF that will matter in the event of a non-payment. It is the role of the ECB that is crucial. The funding of the Greek banking system remains highly dependent on the central bank's Emergency Liquidity Assistance, with a suspension or cap to this financing equivalent to an inability to make deposit withdrawals (or foreign transfers) from Greek banks and de facto capital controls.
The above underscores two important points that we’ve made on any number of occasions. First, whether, when, and to whom Greece defaults is ultimately a political decision that rests in the hands of the IMF and EU creditors. Once again, it’s all about using financial leverage to influence the future course of the currency bloc’s political landscape.
Second, the ECB ultimately controls the fate of the Greek banking sector and therefore Greek depositors because without ELA, banks simply can’t keep up with withdrawals, lending the lie to Tsipras’ Wednesday contention that there is “absolutely no danger” to depositors.
Next, Deutsche takes a look at possible outcomes to the Greek tragicomedy:
No agreement reached, followed by non-payment to the IMF (40% probability). This scenario would likely provoke the most negative reaction from the ECB. Even if cross-default provisions on Greek loans are not triggered immediately, the ECB would likely severely restrict Greek bank access to ELA financing. Rather than declaring the banks insolvent (similar to Cyprus), the most likely avenue for this would be to refuse to raise the regularly reviewed ELA financing ceiling, or more likely, to raise the haircuts required on Greek bank collateral. Our current calculations suggest that Greek banks have around 30-40bn of liquidity available to draw under existing collateral arrangements. An ECB decision to raise haircuts aggressively could leave an implicit "hard" ELA cap that is much smaller, effectively requiring the authorities to reach agreement within a matter of days depending on the pace of deposit outflows and collateral exhaustion.
Agreement reached, but no time/unable to pass through the Greek parliament before IMF payment (30% probability). European creditors will require passage of prior actions through parliament before any disbursements are made. An agreement by the government at the last minute is possible, but there may be no time to secure financing before the domestic political process plays out. The current ruling majority and/or the opposition may refuse to support an agreement requiring a change in government coalition. In this event, it is possible the ECB provides interim financing to pay back the IMF via raising the amount of treasury bills that the Greek government is allowed to issue. However, we would consider it more likely that Greece is allowed to fall into arrears at the IMF and the ECB makes a less binding increase in haircuts on ELA collateral. The latter would maintain the pressure on the Greek side to ratify an agreement, but at the same time would allow ongoing liquidity provision to the banks so long as the approval process is moving in the right direction.
Agreement reached, followed by timely passage through the Greek parliament (30% probability). This would be the most positive scenario, with the government able to quickly draw upon support from its own majority or the opposition to pass the agreement. Assuming the upcoming Friday June 5th IMF payment cannot be made, this would require a staff- level agreement 2-3 days before. In this event we would expect the ECB to tolerate an increase in t-bill financing to make whole on the IMF payment if disbursements haven't been made in time due to other national approval processes.
In sum, there is a 40% chance that Greece simply doesn't pay the IMF next month triggering, at the very least, restrictions on ELA access and, in short order, capital controls as withdrawals could accelerate and (literally) break the bank within "a matter of days."
Alternatively, there's a 30% chance that a deal is reached but proves so politically contentious that its provisions can't be approved in time, making a payment to the IMF logistically impossible and putting the ECB in the rather unpalatable position of having to decide how lenient it wants to be based on the central bank's perception of ratification progress which, incidentally, is essentially the same position Mario Draghi has been in for quite sometime only next month, creditors stop getting paid.
And just in case there were any lingering doubts about where talks are headed or about whether the IMF will be willing to compromise on either pension reform or its demands for the EU to writedown Greek debt in order to make the country's debt-to-GDP ratio more 'sustainable', we'll close with the following three headlines that hit the wires this morning:
- GREECE SAID TO BE FAR APART WITH CREDITORS ON DEBT TALKS
- IMF SAID TO INSIST ON GREEK REFORMS INCLUDING PENSION CHANGES
- IMF SAID TO BELIEVE DEBT RELIEF FOR GREECE MAY BE NECESSARY
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Upcoming event and payments
Thursday May 28th - Eurogroup Working Group to discuss Greece
Wednesday June 3rd - Weekly ECB review of ELA (and every Wednesday thereafter)
Monday June 1st - Bank holiday in Greece
Wednesday June 3rd - ECB monetary policy meeting Friday June 5th - 306mio EUR IMF payment
Friday June 12th - 344mio EUR IMF payment
Tuesday June 16th - 574mio EUR IMF payment Wednesday June 17th - ECB non-monetary policy meeting
Thursday June 18th - Regular Eurogroup meeting
Monday July 13th - 459mio EUR IMF payment
Monday July 20th - 3.5bn EUR maturity due to the ECB Tuesday July 14th - 87mio EUR interest payment
Thursday August 20th - 3.2bn EUR maturity due to the ECB