29 Jun 2015 08:56

Still some light at the end of dark Greek tunnel

Due to the Greek government’s behaviour and unpredictability in recent days, a Grexit unfortunately have high probability. The latest opinion polls however show a nearly 70 per cent support among the Greeks to keep euros, which bodes well. SEB’s Chief Economist Robert Bergqvist summarises the latest in the Greek crisis.

The unexpected decision by Athens during the weekend to hold a referendum on the new bail-out package used efficiently all the limited "amount of oxygen” remaining for further negotiations. Greece took the decision unilaterally without giving information to the Troika. Negotiations are now in a kind of vacuum and the situation for Greece is very serious. Both parties are losers in the absence of an agreement in coming weeks but Greece is sitting, short-term, with the highest price tag.

The main conclusions are:

The International Monetary Fund (IMF) is holding a large part of Greece's destiny in its hands; a constructive interpretation of its procedures provide a negotiating space beyond both June 30 and July 5 (referendum date):

  • The Greek government's unpredictability means that the probability of a "Grexit" is high and rising.
  • We need a deep cut in the repetitive Greek crises, including political changes, economic reforms and a maybe a controlled Grexit to avoid new crises.
What has happened the last few days?

1. The referendum on July 5. Greek Government and the Parliament have decided to let the people say Yes/No to the crisis package that international creditors (Troika) offered the country last week. PM Tsipras urges voters to say no, but is ready to execute measures if the Greeks accept the package. The Troika, on the other hand, says the-re is package to vote on since the parties were unable to reach an agreement during the weekend.

2. ECB stops new emergency liquidity to Greek banks. Today the European Central Bank ECB is ensuring that the Greek banking system constantly have enough of liquidity. When the public has withdrawn money from the banks, the ECB has increased its lending (so far about 90 billion euros) to Greek banks. The ECB new decision does not mean a total cut of this emergency lending to Greece.

3. What happens to the Greek banking system? As a logical consequence of the fact that the ECB is not expanding its ELA, the country must keep the banks closed, probably until next weekend. Greece also introduces capital / FX controls (e.g. maximum withdrawal of 60 euros/day).

What happens now?

1. The status of negotiations. The ”temperature” in the negotiations - and the relationship - between Greece and the Troika has gone from freezing levels to reach absolute zero. Prime Minister and the Finance Minister's actions and behaviour during the crisis have surprised many. There are several reasons for this: difficult situation for the country, lack of political experience and lack of strong political man-dates for PM Tsipras to pursue negotiations. The Troika’s decision now to publish its 10-page crisis proposals suggest that it wants to appeal directly to the Greek people.

2. The deadline of 30 June. At midnight on Tuesday two crucial things will happen for Greece (and the Troika):

  • current bail-out package expires and the last payment of EUR 7.2 billion (out of a total 240 billion) will not be paid out to Greece;
  • Greece must pay 1.5 billion euros to the IMF. Since the country is experiencing a liquidity crisis, a technical de-fault seems unavoidable. However, a delayed payment is not synonymous with being forced to leave the euro although the risk increases.

3. The IMF plays key role. If Greece does not pay to the IMF at midnight on Tuesday, two things could happen:

  • The IMF can directly declare "technical default". That decision will force the IMF to initiate traditional debt renegotiations. These discussions will be complex since Greece is a member of a currency union; it is not entirely clear how responsibilities for the new aid should look like between the IMF and the euro countries/ECB;
  • The IMF can make a friendly interpretation and conclude that "a delay in payment exists." According to nor-mal IMF procedures, it will give Athens an additional 30 days to resolve the situation. Such a scenario would open up for new negotiations, in practice 5 July.
Will Greece abandon the euro?

The euro crisis is still alive despite last years’ many statements about its death. Due to Athens behaviour and unpredictability in recent days, a Grexit have unfortunately high probability. The latest opinion polls show a nearly 70 percent support among the Greeks to keep euros, which bodes well. But Athens’ actions isolate the country from the outside world economically, politically and financially. That could force Greece into a situation where you have to start printing your own money to keep the economy running. In practice, this will be the first step to return to the former currency – and Grexit becomes a fact.