The Greek situation summaries Greece by Deutsche Bank’s George Saravelos have consistently been among the best in the entire sellside. His latest Greek update, which is a must read for anyone who hasn’t been following the fluid developments out of southeast Europe, which fluctuate not on an hourly but on a minute basis, does not disappoint.
But while his summary of events is great, what is of far greater significance is his conclusion, namely that ultimately Europe will fold: “we consider the most likely outcome to be a Eurogroup offer of a new Third program” and “given that the current program expires this February the offer to negotiate a new Third program may provide political room for the government to sit on the negotiating table. At the same time such an offer is very likely to be attached to strict conditions, with the willingness to accommodate t-bill issuance an open question. Developments overnight suggest that this has become less likely, imposing maximum pressure on the government to reach agreement within a matter of weeks.”
If DB is right, and if Europe folds, the question then is what concessions will the ECB and the Eurozone be prepared to give to Italy, Spain and all the other nations where anti-European sentiment has been on a tear in recent months, and especially in the aftermath of Syriza’s stunning victory.
First, the decision shows that the ECB is feeling increasingly uncomfortable providing financing to Greek banks while negotiations are under way. This in turn raises the more important question of how long and how large any ELA provision is going to last. ELA usage is subject to a cap that is under bi-weekly review and requires a 2/3 majority of Governing Council votes to be blocked. The government said that the cap was raised by 10bn this week to be reviewed after developments in the European Council and Eurogroup meetings in the next two weeks.
Big picture, the above two developments are likely to further accelerate timelines and pressure on Greece. The government’s strategy has been to secure a window between March (when the current program expires) and July (when a large GGB ECB redemption is due) over which to negotiate a new program. Time for this negotiating window would have been bought by both Troika and ECB willingness to accommodate increased t-bill issuance to pay for ongoing cash needs over the course of Q2. We have yet to hear from the Eurogroup on its willingness to raise the overall t-bill cap, but even if this materializes today’s ECB decision signals rising discomfort for the central bank to accommodate this, even indirectly via other types of collateral.
Full article: Greece: The Big Picture Update, And Why Deutsche Bank Thinks Europe Will Fold (Zero Hedge)