How The Report That Europe Is Formally Discussing A Greek Default Shook Markets

With Greek PM Alexis Tsipras seemingly determined to take negotiations over pension reform and VAT hikes down to the “Zambian” bundle wire on June 30, and with the IMF having shrugged its shoulders, sighed, and traveled back to Washington, EU officials are now formally discussing what formerly was not to be mentioned in polite circles: a Greek ‘Plan B’.

Reuters has the story:

Senior EU officials have formally discussed for the first time a possible Greek debt default as negotiations between Athens and its creditors have stalled ahead of an end-month repayment deadline, several officials told Reuters.


The government representatives, preparing next week's Eurogroup meeting of euro zone finance ministers, concluded at talks in Bratislava late on Thursday that there were three possible scenarios for what would happen with Greece at the end of June. The least likely, they think, is a successful cash-for-reform deal next week in time to meet end-June legal deadlines.


The second possibility was a further extension of the current bailout programme, which expires this month at the same time as Greece must repay 1.6 billion euros to the IMF...

Most officials argued that it was unlikely that creditors would strike a deal on reforms with Athens in time to disburse the 7.2 billion euros that remain available to Greece under a rescue programme extended in February for four months.


"It would require progress in a matter of days that has not been possible in weeks..." one official familiar with the discussions said on Friday.


Officials said that even then, disbursement of loans to Athens by June 30 would be very difficult because of the time needed to finish all the legal procedures necessary.

Therefore, their second scenario was that the current bailout would be extended to keep the 7.2 billion euros, and 10.9 billion euros set aside for Greek bank recapitalisation, available for Athens once a reform deal is reached later.

The money will otherwise disappear and a new bailout agreement would be needed to secure further financing...


Representatives of some euro zone countries, however, believe that governments should prepare for a third scenario -- that of a Greek default.


"For the first time there was a discussion of a 'Plan B' for Greece," a second official said. Two other officials confirmed that such a debate took place.

In other words, EU officials have now stopped pretending that no one has mentioned a Greek default thus far. Of course that contention was absurd on its face considering Greece in fact defaulted on May 12 when it was forced to pay the IMF out of its SDR reserves (which now stand at just €30 million) and then effectively defaulted again last Friday when Athens asked to bundle its June payments so as to buy more time for Tsipras to convince the IMF to pay itself (again) by disbursing its portion (around 50%) of the €7.2 billion remaining in Greece's current (and apparently last) bailout program. 

But to the market (and certainly to the algos) whether or not this most recent headline actually means anything is ... well, meaningless, which is why when the "Plan B" 'news' hit the wires, this happened:

These are your markets on Greek cooking. 

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German FinMin Wolfgang Schaeuble sums up our take on the above...