As the farcical negotiations between Greece and its creditors unfold ahead of a June 5 IMF payment and as Alexis Tsipras is forced to spread false hope just to avoid a terminal bank run, a picture of the Greek endgame has emerged.
We’ve discussed the political implications of both an agreement or a Grexit and we’ve also taken an in-depth look at what a missed IMF payment means for the country’s EU creditors. On the political front, the troika is intent on sending a strong message to leftist political parties (such as Spain’s Podemos and Portugal’s “ascendant” socialists) that using the threat of a euro exit as a way to extract austerity concessions is not a viable negotiating strategy. What this amounts to is an attempt on the part of the “institutions” to subjugate the political process to economics. In terms of skipping a payment to the IMF — who, as a reminder, effectively paid itself earlier this month by allowing Greece to tap its SDR reserves to pay the bills — there are a number of cross acceleration concerns which you can review by referring to the following graphic:
Now, amid accelerating deposit outflows and an hourly flow of conflicting headlines, Deutsche Bank is out with a fresh take on the Greek endgame including an analysis of both the political wrangling that would need to take place in order for parliamentary approval of concessions to creditors and the mechanics of a default to the IMF.
Via Deutsche Bank:
Little has changed in terms of developments on the ground. Despite a number of reports that negotiations may be split into separate chapters and disbursements with more difficult issues left for September, this remains unlikely. The consistent European position has been that a full staff-level agreement between the institutions – inclusive of the IMF – and Greece is required to unlock funding. Talks in this direction has been progressing in stop-start fashion over the last few weeks, with the Brussels Group (former Troika) reconvening again yesterday to continue negotiations. But progress remains slow, with multiple European and IMF officials over the last twenty four hours stating that more needs to be done to reach agreement…
The Greek government’s liquidity position will ultimately drive the timelines over the next few weeks. Close to 1.5bn EUR is due to the IMF in four instalments over the course of June, with Greek government officials repeatedly stating that there are insufficient cash buffers to satisfy these payments. Given that the last IMF payment was made by drawing down Greece’s SDR reserves at the fund, an exhaustion of cash buffers is a fair assumption. The most likely catalyst in coming weeks is therefore likely to be the Greek government’s ability or not to pay the IMF…
Second, the ECB ultimately controls the fate of the Greek banking sector and therefore Greek depositors because without ELA, banks simply can’t keep up with withdrawals, lending the lie to Tsipras’ Wednesday contention that there is “absolutely no danger” to depositors.
Next, Deutsche takes a look at possible outcomes to the Greek tragicomedy:
No agreement reached, followed by non-payment to the IMF (40% probability). This scenario would likely provoke the most negative reaction from the ECB. Even if cross-default provisions on Greek loans are not triggered immediately, the ECB would likely severely restrict Greek bank access to ELA financing. Rather than declaring the banks insolvent (similar to Cyprus), the most likely avenue for this would be to refuse to raise the regularly reviewed ELA financing ceiling, or more likely, to raise the haircuts required on Greek bank collateral. Our current calculations suggest that Greek banks have around 30-40bn of liquidity available to draw under existing collateral arrangements. An ECB decision to raise haircuts aggressively could leave an implicit “hard” ELA cap that is much smaller, effectively requiring the authorities to reach agreement within a matter of days depending on the pace of deposit outflows and collateral exhaustion.
Agreement reached, but no time/unable to pass through the Greek parliament before IMF payment (30% probability). European creditors will require passage of prior actions through parliament before any disbursements are made. An agreement by the government at the last minute is possible, but there may be no time to secure financing before the domestic political process plays out. The current ruling majority and/or the opposition may refuse to support an agreement requiring a change in government coalition. In this event, it is possible the ECB provides interim financing to pay back the IMF via raising the amount of treasury bills that the Greek government is allowed to issue. However, we would consider it more likely that Greece is allowed to fall into arrears at the IMF and the ECB makes a less binding increase in haircuts on ELA collateral. The latter would maintain the pressure on the Greek side to ratify an agreement, but at the same time would allow ongoing liquidity provision to the banks so long as the approval process is moving in the right direction.
In sum, there is a 40% chance that Greece simply doesn’t pay the IMF next month triggering, at the very least, restrictions on ELA access and, in short order, capital controls as withdrawals could accelerate and (literally) break the bank within “a matter of days.”
Full article: “The Greek Endgame Is Here”: Probability Of IMF Default Now 70%, Says Deutsche Bank (Zero Hedge)