Greece’s day of reckoning may be fast approaching. Athens will have to pony up more than €2 billion in debt payments this Friday to the ECB, the IMF, and (get this) Goldman Sachs, for an interest payment on a derivative and it’s not entirely clear where the money will come from. On Wednesday, the government will vote on a “plan” to boost liquidity which includes tapping public funds and diverting bank bailout money. Here’s Bloomberg:
Greece will begin debating measures to boost liquidity as the cash-starved country braces for more than 2 billion euros ($2.12 billion) in debt payments Friday…The government’s revenue-boosting plan includes eliminating fines on those who submit overdue taxes by March 27 to encourage payment, helping cover salaries and pensions due at the end of the month. The bill also requires pension funds and public entities to invest reserves held at the Bank of Greece in government securities and repurchase agreements, and transfers 556 million euros from the country’s bank recapitalization fund to the state. A vote on the measures is scheduled for Wednesday…The Goldman Sachs derivative, now held by the National Bank of Greece, masked the country’s growing debt when it was agreed in 2001, helping it meet European Union rules for entering the euro area. The interest payment adds to the country’s funding woes as the government misses budget targets and the ECB refuses to allow Greek banks to keep the country afloat with additional short-term debt.
Despite government claims that it can meet its obligations, outside observers aren’t so sure. German FinMin Wolfgang Schaeuble for instance, can’t find anyone who can explain it:
“None of my colleagues, or anyone in the international institutions, can tell me how this is supposed to work.”
Meanwhile, one senior fellow at the Brookings Institution suggests Athens is winging it entirely at this point:
“The impression given is that there’s no plan A or plan B. There’s nothing.”
With the situation deteriorating rapidly, the sell side is back to drawing up Grexit plans. For their part, Morgan Stanley sees a 60% chance of either a euro exit or what the bank is calling a “staycation,” which basically means that the situation is so convoluted that no one can figure it out leading to the imposition of capital controls and a painful prolonging of the inevitable. Here’s more from MS:
Grexit – what’s the probability?We recap the three alternative scenarios worth exploring:1. Euro stay (40% probability): This scenario would be the result of political compromise. Basically, of the ‘impossible trinity’ that Syriza wants (stay in the euro; be in power; and undo the bailout programme), what gives is that the Greek government doesn’t undo the bailout programme. We assume that it recommits to implementing a slightly less demanding package of measures in agreement with the official lenders, and prospects of somewhat less austerity, extra maturity extensions and interest rate reductions on the EU loans, as well as ECB QE, help find a compromise (see here). This is still our base case but, compared to our previous assessment of 55%, we think that the chances of this outcome have diminished, given the inherent difficulties in finding a middle-ground solution, mostly given Greece’s political constraints domestically, and Europe has little appetite for further slippages.2. Euro exit (25% probability): This would happen if the lack of a Greece-Troika compromise led to bitter negotiations, then a worsening in market reaction, negotiations ultimately failing and Greek banks being cut off from ECB funding. It could also happen if the EU perceived low contagion risk and/or viewed the political precedent of a Greek euro exit as not that bad – in which case Greece would be ‘let go’. The chances of this outcome playing out have not increased, in our view; yet they haven’t diminished either. While this is not our base case, we believe that the probability of a misstep remains substantial – given an unstable economic, bank deposit and sovereign funding situation – and may well lead to an exit.3. Euro staycation (35% probability): This is an intermediate scenario where nocompromise is reached over a 3-6-month horizon. We presume capital controls would be introduced to limit money outflows, and Greece, like Cyprus, would effectively no longer be a full member of the eurozone, even though formally it would stay within the currency union. Full euro membership would eventually be restored once/if all capital controls were lifted. This scenario, after some time, could evolve into either of the other two. Should this happen, we’d see a 60% probability that an exit might follow, taking a 12-18 month view, and a 40% probability that capital controls get lifted. Further damage to the economy, banking system and confidence may well lead to this outcome, especially if accompanied by policy mistakes.Endgame probabilities: Even though it’s beyond the scope of this note, the ‘fully computed’ probabilities – i.e., taking into account that staycation, in the end, either becomes exit or stay in the medium term – suggest that the chances of the euro stay scenario are just slightly more than even. As such, the outlook really is binary, with considerable downside risks – should capital controls be introduced. Besides economic developments, deposit flows and sovereign funding, what’s worth monitoring is the negotiations on the measures that Greece is supposed to implement by the end of April, and whether a more durable solution can be found before the expiration of the four-month extension at the end of June.
...and here’s a bit on systemic risk…
But wouldn’t Grexit make the euro a riskier proposition? Yes, we think that Grexit could conceivably affect market participants’ reaction function – perhaps for a long time. It’s probably fair to say that, if it’s just one of the smaller countries leaving, the overall impact of a euro exit scenario may well be more manageable for the rest of the region and the contagion effects rather limited if the policy response is strong enough. Yet even that would likely change the dynamics of EMU and negate the concept of irrevocability. So Grexit has the potential to leave the impression that the eurozone is no longer a monetary union, but more akin to a collection of fixed exchange rates. From a logical standpoint, if one country leaves, market participants may think that, in a subsequent crisis, others could follow, which may make bond markets in the EU periphery respond much more negatively to a future shock.
...followed by projections for the euro…
Exit (25% probability) => EURUSD to decline to 0.82A Greek exit is still the most bearish scenario for EUR, in our view. A country leaving the eurozone, even one of the smaller countries in the periphery, will have a major negative impact on EUR. We believe that this may change the dynamics of EUR, implying that the eurozone is no longer a monetary union, but rather a collection of fixed exchange rates. Under the scenario of a Greek exit, we now project EURUSD at 0.82, especially if a Greek exit starts to increase the probability of other countries leaving.Staycation (35% probability) => EURUSD to decline to 0.90 However, where we believe the risks have increased the most is for our staycation scenario. The potential for a staycation, where Greece stays in the euro but only with the assistance of additional measures, has increased with a probability of 35%, in our view, up from the 20% we assumed previously. This implies that the probability of the EUR decline exceeding our 1.05 base case projection (euro stay scenario) has also increased significantly. One of most significant measures, as far as EUR is concerned, could be the introduction of capital controls for Greece. While not as severe as an exit from the euro, it would once again call into question the eurozone as a monetary union. This, we believe, would expose EUR to increased downward pressure. Under our staycation scenario, we would now expect EURUSD to achieve 0.90 by year-end.
...and ending in a rather dire outlook for the Greek banking sector…
We’ve been here before: As the chart below shows, at the peak in 2012, one-third of Greek balance sheets were funded by the ECB, mostly via ELA. This coincided with the height of deposit outflows at 20%Y in June 2012 – when a Greek euro exit was most anticipated – and had remained c.30% below its peak before this latest round of outflows.Eurosystem funds withdrawal in event of a euro exit leaves €82bn loans unfunded: Should deposit outflows further accelerate against fears of potential euro exit, at which point the ECB would stop funding Greek banks, the system would be faced with a large and arguably unmanageable funding gap. We estimate that a 20% decline in deposits – the highest percentage we have seen in a single year (2012) – would result in a funding gap equal to about €82bn, > 40% of GDP.
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The bottom line here is that the supposedly “indissoluble” monetary union is looking more dissoluble by the day and if there’s anything the ECB does not need a week into PSPP it’s for sovereign spreads to blow out as the market begins to price in redenomination risk.
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