From BofAML:
The European proposal is asking three times more fiscal measures than what the former Greek government was willing to accept, despite a much lower primary surplus target. The Greek proposal is not specific enough on reforms, while insists on pre-election promises that we believe are unacceptable to the other side—reversing labor market reforms and asking for debt restructuring. Even in VAT, where reports suggested an agreement was close, there are large differences. It is hard to see much progress until the discussions focus on one draft which, given parliamentary constraints elsewhere, it is likely to be closer to the one of the lenders in our view.
Greece needs to agree with the creditors on the requirements for the current program review in the next 1-2 weeks. This will be very difficult given how far the proposals of the two sides are at this point.
The Greek parliament will have to vote and approve the deal. If approval requires support from opposition parties, the government should remain in power, or a new coalition government should be formed quickly, to avoid political uncertainty that could delay official funds. Certain European parliaments will also have to approve the deal.
The deal will need to provide sufficient funds to Greece to repay the IMF and the ECB during the summer—about €10bn total.
Negotiations should also start soon on a new program that will include policies and funding for the next 2-3 years. Such a program will have to be finalized by this fall. If the Greek government loses its parliamentary majority, new elections could take place before approving a new program.
And Barclays:
Negotiations are gathering pace, nonetheless the gap is still substantial and we believe that bridging it may take longer than many expect. Moreover, we think a compromise on policies by the Greek government will carry a non-negligible political cost for the Syriza-led government and could trigger a political crisis that could accelerate deposit outflow and result in the imposition of administrative controls on Greek banks. But, if progress continues, we believe Europe will find a way to release some funds (even prior to a full-programme agreement) in order to avoid a default. The cash could come from the EUR10.9bn bank recapitalization funds (this would require the agreement of the ESM board, ie, a 85% majority vote) or the release of c. EUR2bn of SMP profits (which is part of the remaining €7.2bn of the last tranche). In any case, we do not believe that the crisis will be solved before the summer break, and it is very likely that Greece will remain a major uncertainty after the summer as the government and the institutions will need to agree on a third bailout, probably including a debt restructuring (OSI). Moreover, should a political crisis result in snap elections after the summer, which we think is a possibility, it would delay the process even further.
In our view, PM Tsipras’ aggressive speech last Friday was aimed at uniting his party, as divergence is mounting about the strategy to adopt with the creditors. Some members of Syriza are now openly calling for a default and an exit from the euro area, but according to a poll released over the weekend by Metron Analysis, 79% of Greeks want to stay in the eurozone, although 45% would vote for Syriza should new elections were held now. We still believe that an agreement will eventually be reached to avoid a Greek default, possibly through an extension of the programme beyond the end of June and a partial disbursement of the remaining bailout funds, but we think it could trigger a political crisis as the most radical faction of Syriza would not accept the conditions. Moreover, talks will probably continue until after the summer to agree on a third bailout, probably including a debt restructuring (OSI).
…With the risk of a default increasing, and possibly leading to an exit ‘by accident’ from the eurozone, deposit outflows are likely to continue and put additional pressure on the banking system, which relies more and more on the Emergency Liquidity Assistance from the Bank of Greece. During the weekend, Daniele Nouy, head of the Single Supervisory Mechanism, reportedly said that Greek banks were solvent, which should enable the ECB to continue to provide access to the ELA to Greek banks at least until the end of June (Die Welt). However, if there is no sufficient progress in the coming weeks and should creditors not officially extend the programme ending in June, then we believe in all likelihood the Eurosystem would not be able to continue funding Greek banks under the same terms (ie a at least a haircut increase is very likely). Moreover, if Greece were to default on its IMF loans, or on the bonds currently held by the ECB under the SMP, which are due to be repaid in July and August, we think Greece may then be forced to impose capital controls. In any case, we believe it is clear that without receiving further aid, Greece will not be able to pay €3.4bn that is due to the ECB on 20 July.
