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