With Greece "Everything Must Go Right From Now On" To Avoid Market Shock

Greek Minister of State Nikos Pappas and Deputy Foreign Minister Euclid Tsakalotos are in Brussels today, for political negotiations, Bloomberg reports, as Athens seeks to address short-term liquidity concerns on the heels of a fractious week that began and ended with fire and brimstone rhetoric from PM Alexis Tsipras. 

Recapping, Tsipras penned a lengthy and scathing op-ed late last month before submitting what he called a “reasonable” proposal to creditors last Monday. An emergency meeting between the EU top brass produced a draft agreement on Tuesday. Tsipras promptly shot it down, before delivering a speech to the Greek parliament on Friday during which he expressed his disappointment at the troika’s tactics and continued to insist that creditors were attempting to “blackmail” Greece. Over the weekend, EU Commission President Jean-Claude Junker reportedly declined a phone call from Tsipras because there “was nothing to talk about.” The Greek government has denied the call ever took place. 

World leaders meeting in Germany for a G-7 summit put up a united front, after US President Barack Obama put Greece on the agenda. “There was unanimity of opinion in the room that it was important for Greece and their partners to chart a way forward that builds on crucial structural reforms,” The White House said, with spokesman Josh Earnest adding that "there is obviously a deadline looming [and the President] is certainly hopeful that Greece and their partners will be able to chart this path without undue volatility.”

“There is full agreement at the G-7 that everything must be done in order to avoid Greece exiting the euro, but also that Greek citizens, actually the Greek government, must be the first to send a signal,” Italian PM Matteo Renzi said (because Italy is certainly the model for fiscal responsibility). 

For his part, Junker says he and Tsipras are still friends, but claims Tsipras misrepresented creditors’ proposal when he addressed parliament last week. “I don’t have a personal problem with Alexis Tsipras, but friendship, in order to maintain it, has to observe some minimal rules,” Junker said, adding that “he was presenting the offer of the three institutions as a leave-or-take offer. That was not the case. That was not the message given to him.” 

So, just as we said over the weekend when we noted that “the hurt feelings will likely give way to reluctant (and painfully repetitive) talks next week,” Greece and its creditors will be back at it, and while words like “deadline” and “ultimatum” have become somewhat of a joke as they relate to the Greek drama, at least one EU FinMin thinks the point of no return is June 30:

  • FRENCH FIN MIN: NO AGREEMENT WITH GREECE POSSIBLE AFTER THE END OF JUNE

Meanwhile, BofAML syas “a positive scenario requires almost everything to go right from now on.

“Greece needs to receive new funding before the end of June, otherwise it will not be able to repay the IMF on June 30 … which would put ELA access of Greek banks at risk,” the bank adds. Here’s more:

The European proposal is asking three times more fiscal measures than what the former Greek government was willing to accept, despite a much lower primary surplus target. The Greek proposal is not specific enough on reforms, while insists on pre-election promises that we believe are unacceptable to the other side—reversing labor market reforms and asking for debt restructuring. Even in VAT, where reports suggested an agreement was close, there are large differences. It is hard to see much progress until the discussions focus on one draft which, given parliamentary constraints elsewhere, it is likely to be closer to the one of the lenders in our view.

Greece needs to agree with the creditors on the requirements for the current program review in the next 1-2 weeks. This will be very difficult given how far the proposals of the two sides are at this point.

 

The Greek parliament will have to vote and approve the deal. If approval requires support from opposition parties, the government should remain in power, or a new coalition government should be formed quickly, to avoid political uncertainty that could delay official funds. Certain European parliaments will also have to approve the deal.

 

 The deal will need to provide sufficient funds to Greece to repay the IMF and the ECB during the summer—about €10bn total.

 

 Negotiations should also start soon on a new program that will include policies and funding for the next 2-3 years. Such a program will have to be finalized by this fall. If the Greek government loses its parliamentary majority, new elections could take place before approving a new program.

Barclays has a bit more color on the negotiations and on what we have argued is a looming government shakeup:

Negotiations are gathering pace, nonetheless the gap is still substantial and we believe that bridging it may take longer than many expect. Moreover, we think a compromise on policies by the Greek government will carry a non-negligible political cost for the Syriza-led government and could trigger a political crisis that could accelerate deposit outflow and result in the imposition of administrative controls on Greek banks. But, if progress continues, we believe Europe will find a way to release some funds (even prior to a full-programme agreement) in order to avoid a default. The cash could come from the EUR10.9bn bank recapitalization funds (this would require the agreement of the ESM board, ie, a 85% majority vote) or the release of c. EUR2bn of SMP profits (which is part of the remaining €7.2bn of the last tranche). In any case, we do not believe that the crisis will be solved before the summer break, and it is very likely that Greece will remain a major uncertainty after the summer as the government and the institutions will need to agree on a third bailout, probably including a debt restructuring (OSI). Moreover, should a political crisis result in snap elections after the summer, which we think is a possibility, it would delay the process even further.

 

(a guide to negotiations)

 

Barclays also suggests that Tsipras' defiance is politically motivated, something we've suggested time and again:

In our view, PM Tsipras' aggressive speech last Friday was aimed at uniting his party, as divergence is mounting about the strategy to adopt with the creditors. Some members of Syriza are now openly calling for a default and an exit from the euro area, but according to a poll released over the weekend by Metron Analysis, 79% of Greeks want to stay in the eurozone, although 45% would vote for Syriza should new elections were held now. We still believe that an agreement will eventually be reached to avoid a Greek default, possibly through an extension of the programme beyond the end of June and a partial disbursement of the remaining bailout funds, but we think it could trigger a political crisis as the most radical faction of Syriza would not accept the conditions. Moreover, talks will probably continue until after the summer to agree on a third bailout, probably including a debt restructuring (OSI). 

The bottom line is this:

With the risk of a default increasing, and possibly leading to an exit 'by accident' from the eurozone, deposit outflows are likely to continue and put additional pressure on the banking system, which relies more and more on the Emergency Liquidity Assistance from the Bank of Greece. During the weekend, Daniele Nouy, head of the Single Supervisory Mechanism, reportedly said that Greek banks were solvent, which should enable the ECB to continue to provide access to the ELA to Greek banks at least until the end of June (Die Welt). However, if there is no sufficient progress in the coming weeks and should creditors not officially extend the programme ending in June, then we believe in all likelihood the Eurosystem would not be able to continue funding Greek banks under the same terms (ie a at least a haircut increase is very likely). Moreover, if Greece were to default on its IMF loans, or on the bonds currently held by the ECB under the SMP, which are due to be repaid in July and August, we think Greece may then be forced to impose capital controls. In any case, we believe it is clear that without receiving further aid, Greece will not be able to pay €3.4bn that is due to the ECB on 20 July.

In a way, all of this is largely irrelevant, because as we've shown, Greece will remain Europe's debt serf for decades and indeed, if the country's economy doesn't find its footing, these negotiations could repeat themselves periodically for some time to come. That is unless Athens abandons the euro and that, Dutch central bank director Job Swank says, would "for sure give a shock":

"We have never experienced a Grexit or a country leaving the monetary union. It will for sure give a shock."

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