Just a few days after we wrote that a Grexit was quite unlikely, the entire situation has been evolving dramatically and the Euro-puzzle is breaking up in fragmented pieces again. The comments of the Greeks saying that they aren’t interested in renewing the bailout deal with the Troika has sent a true shock wave throughout the European financial sector. Just a few days after the announcement, the ECB is starting to think about separating from the troika, which would then solely consist of the IMF and the European Commission.
Such a separation would be highly unexpected as the partnership between the three important institutions seemed to be quite strong. Citing a ‘potential conflict of interest with its Quantitative Easing program’, the ECB is choosing for the easy way out and then it will be interesting to see whether or not the IMF and the European Commission will have enough leverage to force the Greeks to continue to implement changes. This probably won’t be the case as the ECB is by far the most important institution of the triumvirate for the Greeks as it will purchase Greek sovereign bonds (which will reduce the borrowing costs for the country) as well as providing a line of credit for the Greek banks.
And this is exactly why Greece would like to keep the ECB as its best friend. Since the left-wing Syriza party has won the elections, there was a capital flight from Greece towards safer countries like Switzerland and Luxemburg. This obviously caused liquidity problems for the Greek banks and Reuters reported the European Central Bank had to step in and provide 2B EUR in emergency funding to three Greek banks. This emergency fund line will be valid for two weeks, but there’s little doubt these terms will have to be extended and increased.
The Greek minister of finance also has launched some ideas which actually make a lot of sense. They already seem to have stepped back from the demand to take a haircut on the value of the debt (unsurprisingly as we already saw through this strategic move in our previous column) and have now proposed debt swaps of which a part will be linked to nominal economic growth of Greece, which is actually a good plan. Another idea was to convert the debt owed to the ECB into perpetual bonds which actually is a naughty strategy to just keep on postponing the repayment of the outstanding debt.
The ECB agrees with our point of view and has already announced it doesn’t want to play ball. But what’s more interesting in this situation is that the Greeks have now effectively increased the pressure on the ECB and more importantly, central banker Draghi has now been put in the middle of a political mine field. If he takes one wrong step, the entire situation will explode.
It will be very interesting to see how this situation could be solved, but in just 48 hours, Greece was able to blow up the troika (increasing the likelihood of chaos erupting) despite the strong ties between the three partners. The situation has evolved into a chess game and the next strategic move by any of the parties involved will be important as it could push the entire Eurozone over the edge as a lot of other countries are watching how this situation is unfolding. Should the Greeks be successful in their attempts to play hardball, then there’s no reason why Italy, Spain, Portugal and Ireland wouldn’t try it as well.
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