July 07, 2015


Grexit beckons without a deal tonight

We have had many critical moments in the Greek crisis, but tonight is probably the most important one. We would not rule out the possibility of a deal - as one never should - but a lot of people would have to change many of their positions. In the meantime, time is fast running out for Greece.

The ECB decided to keep extraordinary liquidity to the Greek banks at the level of €89bn where it's been for two weeks now, but it "adjusted" - meaning "raised" - the haircuts because "the collateral they use in ELA relies to a significant extent on government-linked assets". The ECB's determination to "use all the instruments available within its mandate" was questioned by Martin Sandbu in an FT comment where he points out that the ECB's mandate (article 127) includes, so long as it doesn't conflict with price stability, "to promote the smooth operation of payment systems", which is clearly not the case in Greece as a result of the serial decisions to keep ELA capped and, lately, to increase the collateral haircuts. It is unclear by how much the collateral was tightened yesterday. A source told Reuters that the haircut was increased by 10% "on some of the collateral". Based on various published estimates of the available collateral this could represent a margin call of up to €25bn in additional collateral, though it could be less. "Well placed sources" told Robert Peston of the BBC that the spare potential liquidity has been cut "from €17-20bn to between €5-7bn" which would be consistent with these estimates.

Sandbu also highlights the mandate "to support the general economic policies in the Union" which includes "to break the vicious circle between banks and sovereigns" adopted three years ago. Since the ECB has already capped the amount of Greek government bonds the Greek banks can hold, additional liquidity cannot contribute to monetary financing. And, on the over-collateralisation, Sandbu argues that if loans to the Greek private sector are worth so little as implied by the haircuts, then the ECB is failing in its capacity as bank supervisor by keeping the banks open. But, as headlined in another FT story, the ECB is shunning the executioner's role. The ECB, it is assumed, will hold off until July 20 when a Greek government default on bonds held by the ECB looms, but it is said that two members of the Governing Council objected to the ELA extension yesterday and wanted tougher measures adopted.

In the meantime, the new Greek finance minister Euclid Tsakalotos extended the bank holiday for two days until the end of Wednesday, reports Bloomberg

It is unclear for how long the Greek economy can go on like this. Sources told the FT that the Bank of Greece may be swapping stocks of €200 and €500 bills for lower denominations in order to be able to stock ATMs, and the situation on the ground remains calm. However, the lack of access to cash led Western Union to stop wiring money into Greece last week. But the really damaging effect of the capital controls is on trade credit, and the need to ration access to imports. It is unclear for how long the Greek economy can continue like this, but we think even July 20 is optimistic. According to To Vima, the Euro Working Group yesterday rejected the latest Greek bridging proposal, with the German delegation in particular introducing the issue of Grexit, though it is unclear on what terms. So, while the creditors could attempt to string the Greeks along for weeks by serially rejecting proposals, there seems to be no appetite for this. The fashionable topic among German politicians is "humanitarian aid".

Because everyone agrees there is no "trust" between the parties, the Greek government might not want to do "Grexit" on Schäuble's terms, so we looked at how Greece could arrive at Grexit on their own terms. What is really biting Greece is that the ELA cap entails a limit on access to the Target2 payment clearing system, so what Grexit effectively means is to free itself from Target2 for international payments so as to be able to lift liquidity restrictions on the banks - or to restrict Bank liquidity for the national interest rather than for eurosystem interest. One mechanism for doing this would be as follows: the Bank of Greece could clear international payments through one of the specialist international clearing banks, namely Euroclear in Belgium or CLS in the US. This would require a margin account for which the Bank of Greece could use its foreign assets (€4bn in reserves plus some €24bn of foreign securities) which, being a reasonable fraction of Greek GDP, would provide security for Greek firms to clear sizable international payments through the Bank of Greece. Greek banks could contribute any good collateral not immobilised under ELA to increase the margin amount and with it the daily volume of payments that could be settled. 

Our other stories

It is all about Greece today. We take a look at reactions in Germany, the Netherlands and Finland in particular, and on the latest developments in the negotiations.

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