The lack of an interim deal signals that the two sides remain divided despite being closer than they have been. Crucially, Greece agrees on pension savings worth 1% of GDP but it plans to get there mainly via higher contributions, while creditors prefer phasing out top-up pension payments and aggressively cutting early retirement.
Debt repayments fall due
Meanwhile, the government faces an IMF repayment (EUR1.5bn) and pension/wage bills of around the same amount on June 30. The good news is that the ECB holds EUR1.5bn in SMP profits that can be rapidly disbursed in the event of a deal without need for national parliamentary approval. So a default can be avoided last minute. But failing this, falling into IMF arrears is a significant negative event even though a market default rating would not be automatically applicable.
ECB’s ELA lifeline becomes a bargaining chip
Deposit withdrawals seemed to slow after Monday’s positive tone but are likely to have picked up again given the change in mood. As long as talks continue the ECB’s ELA lifeline will be extended to Greek banks, but continued assistance depends on implicit progress in talks. In our view, defaulting on the IMF while talks continue would force the ECB’s hand to at least apply higher haircuts to ratchet up the pressure on the government.
Even if an interim deal is reached, four (possibly six) Eurozone countries need parliamentary approval and within Greece the government may have to change its coalition as part of Syriza and the Independent Greeks oppose the creditors’ measures. In our view, the Greek government may also wish to obtain a popular mandate for accepting a deal through a popular referendum, but recent polls suggest broad support for striking a deal to stay in the Eurozone.