Question 1: Is the Eurogroup meeting on 18 June the last chance?
Contrary to what many observers have suggested, we do not believe so. If no agreement is found today, there are still 12 days left before the 30 June deadline, which leaves the door open for further Eurogroup meetings. The fact that some national parliaments (in particular the Bundestag) have to approve the political agreement reached by the ministers of finance before the funds are released is not a problem: recent experience has shown that this issue can be dealt with in one day and that in the event of parliamentary holidays (which will certainly be the case in Germany), an extraordinary session can be called. In our opinion, however, it is unlikely that an agreement will be reached today.
Rumours on the introduction of capital controls in Greece will then probably intensify, which in all likelihood will give rise to significant volatility in the markets.
Question 2: What happens if Greece does not repay the EUR 1.6 billion due to the IMF on 30 June?
The IMF would then suspend all its new payments to Greece as long as the arrears have not been settled. However, in the eyes of the rating agencies, this non-payment would not be a payment default. Note in this respect that given the IMF’s internal procedure, it would take a long time before the fund declares one of its loans in default (Special Report No. 33: What happens if Greece fails to pay the IMF in June?). That would mean1 that in the eyes of the ECB, Greek banks would remain solvent2 , so the event would not be a well-founded reason to stop the Emergency Liquidity Assistance (ELA). On the other hand, the flight of deposits would intensify, requiring 1 We do, however, recognise that it is impossible to be completely certain. In its policy for the management of the collateral it takes in repos, the ECB still takes into account the agencies’ opinion in its definition of a “default”.
Nevertheless, we will point out that it has kept its leeway for interpretation. 2 There is a close link between the sovereign’s solvency and the banks’ solvency, as 50% of their capital consists of tax credits. In addition, they hold a good part of the EUR 39 billion in market debt still in the private sector’s assets. the introduction of capital controls in the same way as in Cyprus in March 2013 (Charts 1A and B).
Besides, the ECB would undoubtedly make the ELA conditional upon the implementation of such measures, as the Governing Council would reject any further increase in the ELA allowed to be used to offset deposit withdrawals. To conclude, and we emphasise this point, a Greek non-payment would not put an end to the negotiations. Nothing would prevent them from continuing – albeit in a particularly adverse market context – with a view to reaching an agreement before the date we believe is the real deadline: the EUR 3.5 billion GGB redemption on 20 July.
Question 3: What happens if Greece does not honour the EUR 3.5 billion redemption due to the ECB on 20 July? It is impossible to answer this question with any certainty, as it is highly political. In practice, much will depend on the ECB. In theory, in the event the government defaulted on its market debt, the ECB would be likely to decide that Greek banks were no longer solvent. The reason is that they hold a large proportion of the EUR 39 billion market government debt still in the private sector’s assets, while 50% of their capital requirements are made up of tax credits. In that case, the ECB would be forced by its regulations to require the Bank of Greece to stop the ELA.
The government’s first reaction would probably be to increase the degree of capital control. But as liquidity in euros would gradually dry up, it would ultimately be necessary to introduce a new currency and Greece would de facto (but not de jure3 ) exit the monetary union. We nevertheless believe that we should keep two important things in mind. First, we believe this decision is far too political to be taken only by the ECB, which is, admittedly, the euro zone’s only federal institution, but whose democratic responsibility is limited to its President addressing the European Parliament once a quarter.
The Governing Council would therefore definitely seek a firm approval from the Eurogroup before taking such action, and we doubt that the ministers of finance would be able to arrive at a unanimous decision on this issue. That is 3 The treaties do not provide for any orderly procedure for an exit from the EMU. why we continue to believe that a Grexit could only be the result of a deliberate, unilateral and non-cooperative decision by the Greek government, announcing that it would default on all or part its external government debt – a scenario we consider very unlikely.
Second, we should not underestimate the capacity for innovation that the various stakeholders have acquired since the start of the crisis, especially when it comes to interpreting the rules. If the discussions show significant progress, we would not be surprised if the ECB for example allows the Greek Treasury to issue more T-Bills to repay the July redemption, thereby giving the negotiators another month (until the EUR 3.2 billion redemption on 20 August) to finalise an agreemen
