Greece – the final month ahead

Overnight we saw the strongest language yet from Greece’s Prime Minister that he will not yield fresh off similar language from the IMF.  There is a veritable sea of articles on the Greek default and Grexit but this succinct and balanced summary from Westpac’s Adrian Corti walks you through the next month.  Given the importance of the Greek situation we are breaking our ‘short and sweet’ rule just for today.  Its worth the read…

“The next four weeks could mark decisive phase in stand-off between Athens and creditors. The five-month stand-off between Athens and its bailout lenders may be entering its most critical phase. Leaders insist publicly that Thursday’s meeting of eurozone finance ministers is the best chance for an agreement to release €7.2bn in rescue funds Greece needs desperately. But privately, officials admit their hopes that the gathering in Luxembourg will prove decisive are diminishing. Greece needs the funds to make a €1.5bn repayment to the International Monetary Fund by the end of June. 

These are some of the key dates in the months ahead:

Thursday June 18: Best chance for a deal

Eurozone finance ministers gathering in Luxembourg for their regularly scheduled monthly hope a deal can be struck. But Yanis Varoufakis, the Greek finance minister who will attend, has made clear he is coming to Luxembourg with no new proposals. Eurozone officials are increasingly coming around to the view that no progress is likely and the discussion on Greece is set to be perfunctory. Although deadlines have come and gone in the crisis, many officials believe a failure to reach a deal on Thursday would take the five-month stand-off to a new, critical phase — with Greece’s bailout expiring at the end of the month. As such, there will barely be enough time to get approval of a new deal in eurozone parliaments — particularly the German Bundestag, which would have to be called back from recess to approve any new deal.

Friday June 19: The morning after   

Finance ministers will still be in Luxembourg for a second day of meetings, this time with all 28 countries in attendance. In theory all the actors who need to strike a deal will be in the same place at the same time. But unless there is a drastic change in circumstances — a sudden market panic, for instance, or long lines forming at Greek banks no deal on Thursday means there would be little to discuss on Friday. If a deal is not reached, eurozone leaders will consider calling an emergency summit of the heads of government from the 19 members of the common currency, according to senior officials. The summit would likely be held on Sunday, although Donald Tusk, the European Council president who would be responsible for convening such a session, would need to announce the gathering shortly after the eurogroup failure.

Sunday June 21: Possible emergency summit  

Some officials believe a eurozone summit would be redundant if no deal is reached among finance ministers, since it is those finance ministries that are best equipped to negotiate the substance of any bailout agreement. But other eurozone officials believe Alexis Tsipras, Greek prime minister, wants to strike a deal. He has insisted repeatedly that any agreement must be reached at the highest political levels, not among technocratic negotiators. Being locked in a room with Angela Merkel, German chancellor, and other EU leaders may be just the circumstances needed for a meeting of minds.

June 22 onward: Worst-case scenarios  

If no agreement can be reached, worst-case scenarios begin to kick in, including capital controls to limit withdrawals from Greek banks and prevent a complete financial meltdown. 

If a Greek bank run were to begin, the European Central Bank — which is keeping Greek banks on life support by approving emergency central bank loans to local financial institutions — could be forced to declare them insolvent and withdraw all assistance. Without the emergency loans, Greece’s banks would collapse and the only way to restart them would be creating a new central bank with a new currency. 

Capital controls would slow this process significantly, buying both sides more time to negotiate and prevent a Greek exit from the eurozone. But once imposed, capital controls are hard to roll back. Cyprus, which was forced to implement capital controls as part of its bailout two years ago, only lifted its final measures in May. In Iceland, it took nearly seven years.

June 25: Any other business  

This is the date for the beginning of a long-scheduled EU summit. However, the meeting already has a full agenda, including UK prime minister David Cameron’s promised unveiling of his plans for renegotiating Britain’s relationship with the EU. Eurozone officials increasingly believe that by this point it will be too late to salvage a Greek deal.

June 30: Expiration date  

The date Greece’s current bailout expires and when it is due to repay €1.5bn in loan repayments to the International Monetary Fund. Without an agreement on a list of economic reforms, officials have said there is no hope of extending the programme for a third time, meaning Greece would be without an EU safety net for the first time in five years.

Unless the bailout funds are paid, Mr Tsipras has made clear he will not make the IMF payment. Although technically this is not a default, since IMF rules consider a non-payment “arrears”, Greece would join a motley crew of developing countries — including Somalia, Cuba and Zimbabwe — that have current or former “overdue obligations” to the IMF.

Although credit rating agencies have said that non-payment to the IMF is not formally a default, the ECB would have to decide if it meant Greece was essentially bankrupt. If it was, the collateral used by Greek banks to get their emergency loans — mostly Greek government bonds — would be worthless. That would mean the ECB having to cut off emergency funding, likely forcing Grexit.

July 1: Uncharted territory  

If the bailout expires and Greece fails to make the IMF payment — but the ECB decides emergency loans to Greek banks can continue — Greece enters what Mario Draghi, ECB president, recently called “uncharted territory”. An economy hamstrung by capital controls, a government without any cash and a banking system struggling on life support, Greece would essentially begin a drawn-out process of economic suffocation.

Some eurozone officials believe such a state of affairs would lead to such anger towards Mr Tsipras domestically that his government would fall. This could mean either new elections or — more likely — a national unity government, like the one that existed under Lucas Papademos in early 2012, to clean up the mess.

July 20: Drop-dead deadline  

This may be the real drop-dead deadline: the date two bonds totalling €3.5bn fall due to the ECB.

Although credit rating agency Standard & Poor’s said recently it would not consider a failure to pay these bonds a full default — it said only non-payment on bonds that are held by private creditors constitutes a default in their books — it would be virtually impossible for Greece to survive inside the eurozone if it defaulted on the ECB.”

Gold and silver are the ultimate safe haven.