Grexit is upon us

Greece is set to default on its IMF loan:

And from Yanis’ own blog

The Eurogroup Meeting of 27th June 2015 will not go down as a proud moment in Europe’s history. Ministers turned down the Greek government’s request that the Greek people should be granted a single week during which to deliver a Yes or No answer to the institutions’ proposals – proposals crucial for Greece’s future in the Eurozone.

The very idea that a government would consult its people on a problematic proposal put to it by the institutions was treated with incomprehension and often with disdain bordering on contempt. I was even asked: “How do you expect common people to understand such complex issues?”. Indeed, democracy did not have a good day in yesterday’s Eurogroup meeting! But nor did European institutions.

After our request was rejected, the Eurogroup President broke with the convention of unanimity (issuing a statement without my consent) and even took the dubious decision to convene a follow up meeting without the Greek minister, ostensibly to discuss the “next steps”.

So it would appear now that Greece will default on the IMF  €1.5 billion  payment due on Tuesday, calling a referendum of the Greek people to decide on whether to accept the creditors deal next Sunday. The Greek parliament voted for the referendum 178 in favor, 120 against, 2 absent, noting that all of the opposition parties except Golden Dawn voted against it.

The European creditors, however, were not the only ones surprised by this step.

No one was more surprised about Greek Prime Minister Alexis Tsipras calling a referendum than his team of negotiators in Brussels.

Shortly before midnight on Friday in the Belgian capital, the Greeks and representatives of the European Union and International Monetary Fund, tucked away in the EU Commission’s Charlemagne building, learned via Twitter that their efforts were in vain, according to an EU official.

Given this will be held after the IMF payment is due Tuesday, it’s all irrelevant according to the IMF head:

The International Monetary Fund will be prevented by IMF rules from providing additional financial assistance to the Greeks if they miss a June 30 payment, Managing Director Christine Lagarde said.

Lagarde, in an interview with the BBC, also said a referendum scheduled in Greece for July 5 may be asking voters to weigh proposals that are no longer under consideration.

“I can’t speak for the IMF program, because the IMF program is on, but the European financial arrangement expires June 30,” she said. “So, at least legally speaking, the referendum will relate to proposals and arrangements that are no longer valid.”

So officially irrelevant and if polling is correct, possibly a huge back-fire on Tsipras and his party:

Although Prime Minister Alexis Tsipras urged Greeks to not approve the creditor’s bailout agreement terms, the first polls in Greece find that most Greeks favor the deal even if it includes a new memorandum.

In a poll conducted by Alco for the Greek newspaper ‘Proto Thema’, 57% of the participants said they would vote yes in the upcoming referendum, favoring a deal.

Another poll conducted by Kapa Research for ‘To Vima’ found that 47% of the population will vote yes approving the agreement, while 33% will vote ‘NO.’

I’ve read quite a lot of commentary over the weekend that points to the fact if Greece defaults it will be contained because it has been going on for so long and everyone is prepared. Unfortunately I don’t think that is really the case. Firstly the Greeks themselves appear to be a little shocked by this as you can see from the continued run on the banking system over the weekend:

More than a third of automated teller machines across Greece ran out of cash on Saturday before they were replenished as Greeks pulled out money on fears their country was set to crash out of the euro, three banking sources said.

Anxious Greeks lined up outside ATMs after Prime Minister Alexis Tsipras made a surprise call for a referendum on austerity terms demanded by lenders, throwing talks with lenders in disarray and putting Greece on the verge of a default.

About 35 percent of the ATM network – some 2,000 out of the 5,500 ATMs across Greece – ran out of euro banknotes at one point during the day and were being replenished, the bankers said. Banks were working in coordination with the central bank to keep the network fed with cash, they said.

Secondly, as I have commented many times over the last few years the biggest issue is that Franco-German banks were some of the biggest lenders to the Eurozone periphery. These banks have been able to hide behind the ECB’s programs in order to obfuscate their balance sheets but, as we saw in the height of the GFC, there is a lot of connected paper and it is only when someone makes a call on those derivatives that we finally see who is holding the can. We know full well that Cyprus is strongly financially connect to Greece, and I expect significant new fall out there, but it is always the stuff no one knows about that brings down financial institutions and I suspect this is all still largely unknown. H&H rightly pointed this out this morning:

Much Greek debt has been passed from the private to the public sector over the past four years but you just never know in contemporary financial markets. That’s the problem, risk is so dispersed and capital so slim, that any credit event of magnitude threatens another daisy chain of defaults that puts everyone under suspicion.

When Greece defaults, and if I were them it I’d make it a doozy, then Europe is going to enter some kind of banking intermarket freeze, peripheral bond yields are going to spike, core rates collapse, and global borrowing costs for anyone externally funded shift structurally higher. Following on, global stock markets are going to take it in the neck.

In the meantime, as I suggested last week, it would appear the ECB is running it’s standard playbook:

The European Central Bank’s governing council is expected to turn off Emergency Liquidity Assistance (ELA) for Greek banks at its meeting later today, according to well-placed sources.

So unless Greek savers miraculously decide to cease withdrawing cash from their accounts, Greek banks would find themselves in serious straits as soon as Monday – because the banks have become dependent on ELA, approved by the ECB but supplied by the Bank of Greece, to provide the cash to depositors who want their money back.

“We think the Greek government will have no choice but to announce a bank holiday on Monday, pending the introduction of capital controls,” said a source.

Lets be clear though, although this is front page BBC, it is from “unnamed sources” and in these types of events you need to be very careful about this sort of thing. It certainly wouldn’t be the first time the media has whipped up a story using itself as the source, but this is an unexpected move by the central bank if it is the case.

So far the ECB hasn’t pulled the ELA, but they haven’t adjusted the program either with funding left at Friday’s level:

  • ECB takes note of decision on Greek referendum and the non-prolongation of the EU adjustment programme
  • ECB will work closely with Bank of Greece to maintain financial stability
  • Emergency liquidity assistance maintained at Friday’s (26 June 2015) level
  • Governing Council stands ready to review decision
  • Governing Council closely monitoring situation and potential implications for monetary policy stance

Given the continued bank run this is likely to push the Greek government to institute a bank holiday along with capital controls, and once that occurs there is little doubt a political crisis will follow quickly.

The Germans may be hinting at something sooner rather than later:

Dr Schäuble said he “didn’t know exactly” what would happen in the coming days, but predicted it would happen quicker than many expected. In a nod to the run on ATMs in Greece, the German finance minister said the drama was likely to reach its peak sooner than the repayment deadline of the €1.6 billion IMF loan on Tuesday.

In keeping with the hard line agreed at Saturday’s eurogroup meeting in Brussels – without the Greek minister – Dr Schäuble ruled out any Bundestag vote to bridge the gap between Tuesday’s IMF deadline and the Greek referendum.

Without a vote from the German parliament – and five other parliaments in Europe – the second Greek programme expires at the end of the month. Under the current circumstances, he said, it was not possible to expose his taxpayers to further risk.

As I stated many times before the issue is more political than economic and although there are many unanswered legal and financial questions in this on-going mess the biggest question is what it means for the other European partners.

There is a general election in Spain on the 20th December and this guy is currently running 3rd, while previously being ahead in the polls:

The leaders of Europe and the International Monetary Fund are jeopardizing the European project by forcing Greece into a corner, the leader of Spain’s Podemos, an anti-austerity party allied with Greece’s ruling party Syriza, said on Saturday.

“The future of Europe is now at risk,” Pablo Iglesias said as euro zone countries appeared to be readying for a Greek default and possible exit from the euro currency.

“In my opinion the problem isn’t Greece, the problem is Europe. Germany and the IMF are destroying the political project of Europe,” Iglesias told reporters, speaking in English following a rally in support of Greece in the Spanish capital attended by several hundred people.

“The IMF and the German government are attacking democracy.”

As I have said many times before, the biggest issue is if Greece is let go, there is nothing stopping others. The creditors foolishly took on the loans of Greece in 2010 to save political face, they are now paying the price for that. There are many unanswered legal, financial, political and social question as to what happens next for Greece but it would appear, without some significant back flips from one side this is the beginning of the end for Greece in the euro.

Comments are hidden for Membership Subscribers only.