Macro Weekly Ten big questions on Greece
Group Economics
Nick Kounis +31 20 343 5616
19 June 2015 Greece has once again been making the wrong kind of headlines and is very much front of mind for investors. The breakdown of talks between the Greek delegation and the institutions and inflammatory rhetoric by Greek Prime Minister Tsipras has raised worries about a Greek default and euro exit. Thursday’s Eurogroup made little further progress towards a deal, though an emergency Euro Summit has been planned for Monday. In this note we try and answer ten big questions that arise. 1. What is the current state of play?
Despite the stand-off we think that both sides have too much to
Some progress has been made but there is still a significant
lose and will eventually reach an agreement. As discussed
gap between the two sides. The Greek government finally
below, a Greek euro exit would have negative consequences
accepts a primary surplus target of 1% GDP for this year, and
for both sides. Meanwhile, the vast majority of Greeks want to
2% GDP for next year. This is in line with what was proposed
remain in the euro so the government does not have a
by the creditor institutions. The major remaining sticking point
mandate to act in a way which precipitates such an outcome.
now is that the institutions doubt the effectiveness of some of
The good news is that there is still some time left before the
the fiscal measures proposed by the Greek government to
IMF payments are due. We think the differences can be
meet those targets. Greece will likely need to propose more
bridged.
realistic policies to cut spending or raise revenue. The IMF is of the view that Greece needs to cut pension expenditure,
4. What if they do not?
though it has no problem with Greece protecting the poorest
If there is no deal, it is likely that the government will run out of
pensioners.
cash by the end of the month. It will very likely be unable to pay the IMF. The IMF has said that there would be no grace
2. What are the key dates coming up?
period, and that Greece would then be seen to be in default to
An emergency EU Summit has been called on Monday (22
the IMF on 1 July. At that stage Greek euro exit fears would
June), while a Eurogroup meeting will be scheduled some time
escalate. There would likely be more stress in financial
before that in order to try and lay the ground work for a deal.
markets. In addition, there would be more uncertainty in
There is also regular EU Summit scheduled on 25-26 June,
Greece, and deposit outflows would likely start to accelerate at
which could effectively be the last opportunity for a deal to be
a dangerous pace. At this stage, the best case scenario would
wrapped up ahead of Greece’s bundled IMF payment of
be that the two sides get back to the table having had a shock
around EUR 1.6 bn on 30 June. The day after – on 1 July – the
and negotiate a deal, which would see them take a step back
ECB has its regular non-monetary policy meeting, in which it
from the brink.
decides whether or not to veto the Greek central bank’s provision of Emergency Liquidity Assistance to the Greek
5. What happens to the Greek banks?
banks. Beyond that, on 20 July, Greek government bonds held
If Greece misses its IMF payment, the banking system would
by the ECB mature. The principal amounts to EUR 3.5bn,
be increasingly vulnerable to a liquidity crunch. Indeed, reports
while the coupons total EUR 700m.
out of Greece suggest that in the first four days of this week, deposit outflows accelerated to EUR 3bn. Defaulting on the
3. Will Greece and its creditors reach a deal?
IMF would likely see this trend intensify, with a very real risk of
We think they will eventually. Granted, recent rhetoric by
a bank run. Given this, the authorities could in those
Greek Prime Minister Tsipras makes gloomy reading. He said
circumstances decide to pre-empt a bank run by implementing
that the IMF “bears criminal responsibility” for the situation in
deposit and capital controls before the end of the month. This
the country. This is a rather ‘unconventional’ way to address
could occur over the weekend (27-28 June) or following a bank
one of the institutions that you hope will lend you money. He
holiday at the start of the following week.
also said that he was prepared to accept responsibility to say a ‘big no’ to a continuation of the ‘catastrophic policies for
The case for such a move could be strengthened because of
Greece’. Meanwhile, Europe and the IMF have responded by
uncertainty about the continuation of central bank liquidity.
saying that the ball was in Greece’s court and they should
There is a question mark about whether the ECB would
make a new more acceptable proposal to make a deal.
continue to allow the Greek central bank to provide Emergency Liquidity Assistance. The ECB has said that the Greek banks
2
Macro Weekly - Ten big questions on Greece - 19 June 2015
are solvent. In addition, non-payment of IMF loans is not
relatively quickly the economy should eventually regain its
classified as a ‘default’ by the rating agencies. Furthermore, it
footing.
takes a two-thirds majority of the Governing Council to block ELA and the ECB may be reluctant to take a decision with
Still, there are significant risks. A Greek exit could undermine
such adverse consequences, which it judges should be made
investor confidence in the longevity of the eurozone. They
by politicians. On the other hand, it would be uncomfortable for
could then permanently price in higher risk premiums,
the ECB to allow continued ELA in the face of what would be in
especially for the weaker member states. Furthermore,
effect a sovereign default.
member states would not welcome the risk of political instability in a geopolitically important area.
6. Would default mean exit? Not necessarily, but the chances of Greek euro exit would rise
9. Will Super Mario save the day?
considerably. Greece could still reach a deal with its creditors
Yes most likely. In the case that Greek exit risks rise sharply,
after a default and come back from the brink. It could also
the ECB would activate the OMT, and buy large quantities of
theoretically reach no deal and default but stay in the euro.
stressed government bonds. This should push down sovereign
Legally, a member state cannot be thrown out of the single
bond spreads again and generally support financial markets.
currency. Only it can initiate an exit. However, the situation
However, countries in trouble would officially need to be in an
could over time become unbearable for Greece without any
adjustment programme. So it is unclear how quickly the OMT
external financing for the government and banks. The
could be activated.
economy is already back in recession, but it would likely start to contract very rapidly following the liquidity crunch in the
10. What would a long-term solution look like?
banking sector and the implementation of capital and deposit
A long-term deal to revive Greece in the eurozone should
controls. Cyprus is a recent example of this. Sharp falls in GDP
contain three elements. First, serious structural reforms to
would likely push the primary balance into a large deficit. In the
reduce the huge gap with the most competitive and dynamic
absence of external financing, the government would then
countries in the single currency area. Under the previous
need to tighten fiscal policy to balance the books in the face of
government, significant progress was made, but there is much
a deep recession. Greece may decide that the economic and
more to do. Second, a reasonable pace of consolidation to
social hardship was too much to take.
maintain significant primary budget surpluses. Here too Greece, has taken large steps in the past. Finally, debt relief.
7. What would Grexit mean for Greece?
Greece will unlikely be able to return its debt to sustainable
In the first year at least it would mean an even more severe
levels over a reasonable period. Further moves by eurozone
economic crash. The weakness in the economy, banking
member states to reduce the debt will likely be needed. These
stress and fiscal tightening would be ‘complemented’ by a
moves could be incremental and made conditional on the
collapse in the value of the new currency. Inflation would soar.
delivery of reforms.
The central bank would need to be careful in easing monetary policy given the high rate of inflation and the risk to inflation
Greek banks need to rely on ELA
expectations. The experience from countries that have exited currency boards is that eventually, the economy would adjust and rebound. However, in the meantime, social hardship would become severe and there would be a risk of serious political instability. 8. What would Grexit mean for the eurozone? There would most likely be sharp financial stress, with peripheral government bonds and other Southern European assets leading the decline. However, it may not last long. The Greek exposures of the rest of the eurozone are much less
EUR bn
180 160 140 120 100 80 60 40 20 0 Jan-11
Jan-12
MRO + LTRO
than in the past. In addition, policymakers have the tools to intervene. Calm would eventually be restored, though significant economic damage would be done in the meantime. We have already seen signs that the crisis in Greece is undermining confidence indicators, and we would likely see a more significant deterioration. However, if calm returns
Jan-13
Source: Central Bank of Greece
Jan-14 ELA
Jan-15
3
Macro Weekly - Ten big questions on Greece - 19 June 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
2.2
2.4
2.7
3.1
United States
-0.3
0.9
1.8
2.3
Eurozone
Japan
1.6
-0.1
1.1
1.2
United Kingdom
1.7
2.8
2.8
2.6
China
United States Eurozone
3M interbank rate
11/06/2015 18/06/2015
+3M
+12M
2015e
0.29
0.29
0.7
1.5
0.9
2016e 2.4
-0.01
-0.01
0.00
0.00
0.00
0.10
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
0.57
0.57
0.6
1.5
1.0
2.0
11/06/2015 18/06/2015
2016e
7.7
7.4
7.0
7.0
World Inflation (%)
3.2 2013
3.3 2014
3.2 2015e
3.8 2016e
+3M
+12M
2015e
United States
1.5
1.6
0.1
2.5
US Treasury
2.38
2.33
2.7
3.0
2.8
3.0
Eurozone
1.3
0.4
0.4
1.7
German Bund
0.90
0.81
0.8
1.6
0.9
1.8
Japan
0.3
2.8
0.8
1.4
Euro sw ap rate
1.18
1.18
1.1
1.9
1.2
2.0
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.51
0.43
0.6
1.0
0.7
1.0
China
2.6
2.0
1.5
2.0
UK gilts
2.05
2.05
1.7
2.5
2.0
2.7
World Key policy rate
4.3 18/06/2015
3.9 +3M
3.6 2015e
3.7 2016e
11/06/2015 18/06/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.50
0.75
2.25
EUR/USD
1.12
1.14
1.00
1.05
1.00
1.15
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
123.4
123.0
125
135
128
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.55
1.59
1.47
1.50
1.49
1.51
Bank of England
0.50
0.50
0.75
1.75
EUR/GBP
0.72
0.72
0.68
0.70
0.67
0.76
People's Bank of China
5.10
4.85
4.85
4.85
USD/CNY
6.21
6.21
6.26
6.37
6.30
6.40
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
KEY MACRO EVENTS Day
Date
Time
Country
Key Economic Indicators and Events
Monday Monday
6/22/2015 6/22/2015
16:00:00 19:00:00
US EC
Existing home sales - % mom Euro area leaders hold emergency meeting on Greece
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015
03:45:00 08:45:00 10:00:00 10:00:00 10:00:00 13:00:00 14:00:00 14:30:00 15:00:00 15:45:00 16:00:00
CN FR EC EC EC TR HU US US US US
PMI manufacturing - index (HSBC) - flash Business confidence manuf. - index PMI services - index Composite PMI output PMI manufacturing - index Repo rate - % Base rate -% New durable goods orders - % mom FHFA house price index - % mom Markit - Flash PMI New homes sold - % mom
Wednesday Wednesday Wednesday Wednesday
6/24/2015 6/24/2015 6/24/2015 6/24/2015
09:30:00 10:00:00 14:30:00 18:00:00
NL DE US FR
Producer confidence manufacturing - index Ifo - business climate - index GDP - % qoq annualised Total jobseekers - thousands
Thursday Thursday Thursday Thursday
6/25/2015 6/25/2015 6/25/2015 6/25/2015
13:00:00 14:30:00 14:30:00 14:30:00
CZ US US US
Repo rate - % Initial jobless claims - thousands PCE deflator core - % mom PCE deflator core - % yoy
Friday Friday Friday Friday
6/26/2015 6/26/2015 6/26/2015 6/26/2015
01:30:00 01:30:00 10:00:00 16:00:00
JP JP EC US
CPI - % yoy Unemployment - % M3 growth - % yoy Univ. of Michigan cons. confidence - index
Period
Latest outcome
Consensus
ABN AMRO
May
-3.0
4.2
4.8
Jun P Jun Jun P Jun P Jun P Jun-23 Jun-23 May Apr Jun P May
49.2 103.0 53.8 53.6 52.2 7.5 1.65 -1.0 0.3 54.0 7.0
49.4 102.0 53.7 53.6 52.2 7.5 1.50 -0.7 0.5 54.2 -0.7
53.9 53.8 52.4 7.5 1.50 -0.3 0.5 54.0 -0.5
Jun Jun 1Q T May
4.0 108.5 -1.0 26.0
108.1 -0.2
Jun-25 Jun-20 May May
0.05 267.0 0.0 1.0
0.05
May May May Jun F
1.0 3.0 5.0 95.0
0.4 3.3 5.4 94.6
3.8 108.0
0.05
0.1 1.2
5.5 96.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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