Daily Insight Greece D-day scenarios
Group Economics Macro & Financial Markets Research
Nick Kounis +31 20 343 5616
10 July 2015
We look at scenarios for the upcoming European D-day meetings on Greece There is a high risk that a deal proves elusive, though it is a close call We do not see a Greek exit from the euro as representing a Lehman moment Positive scenario: two or three-year ESM deal for Greece, with compromise on debt
Europe has presented Sunday as D-day for Greece
Negative market reaction, but no Lehman
We are now entering a few days that could prove decisive for
Financial markets will most likely react negatively to a no-deal
Greece’s future in the eurozone. Indeed, European leaders
scenario where Grexit looks probable, but we do not see it as a
presented Sunday’s EU Summit as being make-or-break for
Lehman moment. Exposures of the eurozone banking system
Greece. Either there would be a deal, or euro exit would
to Greece are modest and relatively transparent. At the same
become a distinct possibility. It is likely that a picture of the way
time, we do not think other eurozone member states are in a
it is going will start to form before that. Reactions to Greece’s
similar situation to Greece and ready to follow in its footsteps.
reform proposal (due before midnight Thursday) could already give an indication, while Saturday’s Eurogroup could be
Authorities to intervene with force if necessary
crucial. Of course, missed deadlines are a speciality in the
There is a risk that peripheral government bond spreads surge
eurozone, but Greek banks look unlikely to be able to last too
to stress levels. In that event, the European authorities will
much longer under the current liquidity regime. So the Greek
react with force. In the near term, the ECB could decide to step
banking sector may make this a hard deadline this time.
up QE, but if that does not have the required impact, we would expect the central bank to activate the OMT. QE is skewed
Deal may prove elusive
toward core government bonds, while the OMT could focus on
It is a close call what the outcome of the D-day meetings will
‘unlimited’ purchases of peripheral government bonds. To
be. The Greek debt crisis has been characterised by
qualify for the OMT, member states need to be in an ESM
unforeseen twists and turns. However, reaching a deal of the
programme. However, this includes a precautionary credit line,
next few days looks likely to be very challenging and it may
which has very limited conditions.
well prove elusive. The Greek government will be asked to accept a reform programme that is tougher and more
Positive scenario: two or three-year ESM deal
extensive than the short-term extension it failed to agree to
The positive scenario is that Greece and the eurozone agree
over the last four months (and was rejected in the referendum).
to a two or three-year ESM deal. That would mean that Greece
The economic and fiscal outlook is now weaker. In addition,
would need to accept tough reforms and fiscal targets.
the Greek government appears to be looking for upfront debt
Meanwhile, a middle way could be found on debt, where
relief, while the Eurogroup seems only ready to decide on this
incremental debt relief (in the form of maturity extension) is
if Greece implements the measures in a programme.
exchanged for delivery of reforms by certain points in time. Alternatively, Greece could accept debt rescheduling at the
No deal could set scene for Grexit
end of the programme.
A euro exit scenario could materialise if the economic pain of staying in the euro without financing for the government and
There are risks in the positive scenario. For instance, the deal
the banks was judged to be too much by the Greek authorities
would still need to be passed through various national
and public. They may feel they could not accept the necessary
parliaments. Even if it is passed, there is a risk that Greece
conditions for a new programme. The first stage could be the
finds it difficult to stick to the programme in coming months.
adoption of a parallel currency.
The economy looks set for a sharp contraction, which is not the ideal background to be implementing tough measures.