As the situation in Greece continues to cause concern, BNP Paribas Investment Partners has provided a summary of the current situation and is predicting further surprises as the 'endgame' plays out.
The firm comments: “In another dramatic twist in the protracted haggling between creditors and Greece over the country’s debt load and further financial aid, Greek Prime Minister Tsipras has called a referendum for 5 July on the creditors’ latest austerity and reform proposals.”
The referendum, in the bank’s view, has boosted the uncertainty over the outcome of the debt and reform negotiations and increased the odds of a Greek default on IMF loans or even an exit from the Eurozone.
“The ECB has left its Emergency Liquidity Assistance (ELA), which Greek banks have been receiving via the Greek central bank, unchanged at close to EUR90 billion. With many Greeks rushing to withdraw bank deposits, the government has ordered banks to remain closed for at least a couple of days and set a daily limit of EUR60 for withdrawals from cash machines, except for foreigners withdrawing money from a foreign bank account. It imposed capital controls on foreign transactions by Greek residents.”
This news has sent markets into a spin, as it appears to clearly show that market participants now attach a greater likelihood to a Greek exit from the Eurozone.
BNP Paribas reports that the EuroSTOXX 50 equity index fell almost by 7 per cent after the opening, before recovering slightly. “Amid safe-haven buying, benchmark German Bund yields fell by 23bp to almost 0.7 per cent, before settling at 0.8 per cent. The Euro initially lost two cents against the US dollar, before recouping half of the losses. Obviously, even after these market swings, a Greek exit is still not fully discounted, as a positive outcome is still possible. With a majority of Greeks in favour of staying in the Eurozone, there is a decent probability of a referendum outcome in favour of the creditors’ proposals. But until the results are known, we are likely to see continued market volatility” the bank says.
Events today look momentous with the 30 June deadline seeing Greece’s current bailout programme expire and without a deal on new terms and conditions, the remaining EUR7.2 billion of that package will not be disbursed. But if Greek voters back the creditors’ proposals in the referendum, the chances of a new aid programme should improve.
Also today, Greece must repay EUR1.7 billion to the IMF. With the bailout programme running out, it now looks unlikely that Greece can make this payment. IMF Managing Director Lagarde has said that the IMF can no longer give financial assistance if Greece misses the payment. The IMF will then set in motion the process to declare a default, but that will take until after the referendum.
The bank writes: “A default on IMF loans could trigger cross-defaults on loans by the European Financial Stability Fund and could trigger early repayment clauses, but we think it is unlikely that these will be enforced soon. As for cash from the ECB, the central bank could reign in ELA if it felt Greek banks were insolvent, but at least so far, the ECB has not been willing to pull the plug on Greece. It prefers to leave any such decision to politicians. Meanwhile an agreement between Greece and the creditors before the referendum could happen, although we would give that a low probability.”
The 5 July referendum will concern the creditors’ proposals and it is expected that the government will campaign for a No vote.
“The phrasing of the question to be put to voters makes a difference” the banks says. “Apparently the question will be phased in a neutral way as the voters will be asked if they accept a draft agreement submitted by the troika of the EC, the ECB and the IMF at the Eurogroup meeting held on 25 June. But the actual focus can change during the campaign towards austerity and reforms or towards euro membership. Past opinion polls have shown that most Greeks want to keep the euro. If the focus is on the latest proposals from the creditors – more austerity and reform measures – the odds of a rejection look significant.”
Commenting on the resulting potential scenarios, the bank says: “An acceptance of the creditors’ proposals would be the most positive outcome from a financial market perspective. A new rescue package would have to be put together, but apparently the two sides had come closer to an agreement in their recent negotiations. A complication could be that the creditors would have to work with a government that is likely to be very reluctant to implement any austerity and reform proposals. So close monitoring would be required, which could trigger Greek concerns about its sovereignty. Alternatively, a new, technocratic government could be formed, much like the Monti government in Italy in 2011, to implement the new plan.”
However, rejection is what the Tsipras government is banking on since this would strengthen their negotiating position. “But it would also increase the risk of a Greek exit from the Eurozone. Creditors are unlikely to give in to Greek pressure for leniency since other ‘peripheral’ Eurozone member states could also demand more relaxed terms in their financial aid packages. Even in this scenario, there could be surprises.”
