Greece in focus

With more than 60% of the voters joining the “NO” camp, the picture for Greece is still far from clear.

Syriza will likely be emboldened by the result, feeling that they now have a much stronger mandate from the Greek population. This does not necessarily mean that they will find it any easier to negotiate better terms, either in terms of less austerity or outright debt relief, with the creditors.

A new bailout programme will require a new sustainability study to be carried out, not to mention that national parliaments, first and foremost the Bundestag, will have to vote whether there should be negotiations in the first place.

All of this will take time, potentially a long time, likely longer than the 14 days till the deadline for the ECB payment that the Greek government owes. All the while, capital controls are still in place, with the daily cash withdrawal limit, currently capped at 60 EUR, potentially being reduced down to 20 EUR, and end of month payments for pensions and salaries a tough hurdle.

Tomorrow, Tuesday July 7^th, the EU summit will convene to decide on the next steps to take. Unlikely that we will get any more details until after the meeting.

The ECB is now the only institution standing between the Greek economy and financial collapse, via the liquidity support that it still provides to Greek banks to the ELA. At the time of writing, the ELA still remains open and Greek collateral eligible. We think the ECB will keep the ELA up and running for Greek banks and will wait for cues from the EU Summit before taking any decision on the matter.

Dierk Brandenburg, our Senior Sovereign Analyst, summarized the current state of affairs as follows

“Grexit is still not my base case. I expect a measured response from the Eurozone as leaders know that the Greek government will run out of cash within days; following a Franco/German tête-à-tête on Monday a full EU summit will take place on Tuesday by which time the situation could already be dire on the ground in Greece.

My working assumption is that the ECB remains biased towards financial stability and accommodates the Greeks as much as it can possibly justify. The ECB will most likely extend the ELA again but, like last week, not increase the volume. That should ensure that the T-bills can be rolled this week. In that scenario banks remain solvent but illiquid, making it impossible to reopen them on Tuesday as promised before the referendum - instead the Greek government will most likely have to tighten capital controls this week.

Tsipras will need to apply for a third support program, immediately, that he puts tentatively at €30bn over the next two years while the IMF says at least € 50bn are required altogether (not counting the crippling effects capital controls will have on the economy). However, a third program will take several weeks to conclude, which means the ECB will not be paid its bonds on 20 July, forcing it to rely on a 30 day grace period.

It is, however, also possible that the political situation in Greece (and in Germany for that matter) deteriorates much faster on the ground than politicians can react to, in which case the Greek government may need to capitulate to market pressure, taking the Greek banks out of the ECB’s system and starting its own currency regime.

Post referendum this weekend, the Greek finance minister Varoufakis handed in his resignation. This should be considered good news, given how much he had antagonised other EU negotiating parties. The resignation opens up the window for the Greek prime minister to restore trust with his creditors ahead of negotiations this week. However, with the lapse of the program and another week lapsed due the referendum, speed is the essence now.”

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