Greece: More and more confusing, but the clock is ticking

Another extension of the programme is possible, although not straight forward as it would require the approval of some national parliaments, including the Bundestag in Germany.

 

In our view, PM Tsipras’ aggressive speech last Friday was aimed at uniting his party, as divergence is mounting about the strategy to adopt with the creditors. Some members of Syriza are now openly calling for a default and an exit from the euro area, but according to a poll released over the weekend by Metron Analysis, 79% of Greeks want to stay in the eurozone, although 45% would vote for Syriza should new elections were held now. We still believe that an agreement will eventually be reached to avoid a Greek default, possibly through an extension of the programme beyond the end of June and a partial disbursement of the remaining bailout funds. But we think it could trigger a political crisis as the most radical faction of Syriza would not accept the conditions. Moreover, talks will probably continue until after the summer to agree on a third bailout, probably including a debt restructuring (OSI).

Meanwhile, the economic situation continues to deteriorate in Greece, adding pressure on the general government budget. According to the numbers released by the Ministry of Finance last Friday, the state revenue shortfall grew €1bn in May to reach a total of €2bn since the beginning of the year, and forced the government to increase arrears of payment. Without fresh money from its creditors shortly, Greece may be unable to pay €1.6bn to the IMF at the end of June, although it is not clear at this stage what the cash position really is. Indeed, the Greek government submitted a formal request to the IMF to bundle the four payments due into a single payment on 30 June, an unusual but legally acceptable request (as this possibility was meant for administrative ease and not for liquidity management).

With the risk of a default increasing, and possibly leading to an exit ‘by accident’ from the eurozone, deposit outflows are likely to continue and put additional pressure on the banking system, which relies more and more on the Emergency Liquidity Assistance from the Bank of Greece. During the weekend, Daniele Nouy, head of the Single Supervisory Mechanism, reportedly said that Greek banks were solvent, which should enable the ECB to continue to provide access to the ELA to Greek banks at least until the end of June (Die Welt).

However, if there is no sufficient progress in the coming weeks and should creditors not officially extend the programme ending in June, then we believe in all likelihood the Eurosystem would not be able to continue funding Greek banks under the same terms (ie at least a haircut increase is very likely). Moreover, if Greece were to default on its IMF loans, or on the bonds currently held by the ECB under the SMP, which are due to be repaid in July and August, we think Greece may then be forced to impose capital controls. In any case, we believe it is clear that without receiving further aid, Greece will not be able to pay €3.4bn that is due to the ECB on 20 July.