• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

Greece: Raising the stakes

0
  • by James Bevan
  • in Blogs · James Bevan
  • — 29 Jun, 2015

Events of the past couple of days have raised the stakes considerably – with the decision by the Greek government to hold a referendum on the proposed bailout programme and the rejection of even a small extension of the bailout, which expires on Tuesday (30th June), by the Eurogroup. Although we continue to believe that ‘Grexit’ is unlikely, a bank holiday and the imposition of capital controls in Greece have been announced.

Our hope is that the Greek government ends up accepting the terms of a deal at some point, but this may happen after a further escalation of the situation, which could involve formal Greek default and/or withdrawal of the €90bn of emergency liquidity assistance (ELA) to the Greek banks by the ECB, which they’d be unable to meet.

  • At the very latest, that would be 20th July, when €3.5bn of Greek government bonds owned by the European Central Bank mature.
  • At the earliest, it could be Wednesday (1st July), when Greece’s current bailout expires and the €1.5bn that Greece owes to the IMF would be in arrears.

The referendum, if it indeed takes place on 5th July, is another key risk event.

As such, the vital players at this stage of the drama are the Greek government of the day and the European Central Bank. The key issue for the former is clearly if and when to capitulate and, for the latter, if and when to withdraw liquidity support.

Just as the tone and stress has now escalated, so have the costs. That’s especially the case for Greece. But the risks posed by the situation to Euroland’s immature recovery are also growing. If these risks do start to materialise, markets should expect a meaningful policy response.

The most proximate issue is the liquidity support that the ECB provides the Greek banks which have haemorrhaged deposits over the past six months, such that financial support has increased, to close to €90bn as at last Friday (26th June). Given reports of large withdrawals from the banking system since the announcement of the referendum, Greek banks will need further extensions of that liquidity support from tomorrow (29th June) to remain operational. Withdrawal of that support in full would effectively render them insolvent, inasmuch as they would be unable to repay it.

The other option is what the ECB just announced yesterday (28 June): it is keeping ELA support to Greek banks but capping it at current levels – meaning that it will likely be difficult, if not impossible, to keep banks open and functioning normally. Greek authorities have imposed a bank holiday and capital controls to limit further declines in liabilities from the Greek banking system.

There’s also a material risk that the ECB’s support is withdrawn in full. It’s possible that could happen as early as Wednesday (1st July), once Greece is no longer in a formal bailout programme and has failed to pay the IMF. However, as a trigger for such a catastrophic move, Wednesday is sufficiently fuzzy to give the ECB some latitude if it chooses. As failure to pay the IMF need not formally constitute default, the ECB could respond by requiring larger haircuts on the collateral it receives for ELA loans, rather than pull the plug entirely. But the ECB would have a legitimate case to withdraw support if it wanted to.

As we’ve discussed before, a tougher deadline is 20th July, when €3.5bn of Greek bonds owned by the ECB mature. Default on those could render it impossible for the ECB to accept Greek government and government-guaranteed debt as collateral. At that point, liquidity support would likely be cut off. As such, Greece may have a few more weeks, albeit under a prolonged bank holiday or capital controls, to avoid a more catastrophic outcome. And in that respect, next Sunday’s (5th July) referendum – if it indeed goes through – clearly remains a key event. The large parliamentary majority with which the referendum was passed, with no dissent from any Syriza MPs, means that an imminent collapse of the Greek government looks unlikely –but that could change if the Greek financial system is closed down, particularly in holiday season. Any new government would likely be more conciliatory to the creditors.

Consequently, and absent new ideas in the days ahead, the next key political event will be the referendum. Although this will be on a proposal that, theoretically, will no longer be on the table as of Wednesday (1st July), opinion polls suggest that the Greek electorate will vote in favour of the package. That may change, especially as Syriza is campaigning for rejection.

  • A vote to reject the bailout would likely mean default and withdraw of ELA on 20th July.
  • A vote supporting it could allow for a bailout to be salvaged. But it would be politically and logistically challenging and it’d require a new Memorandum of Understanding, supported by a new Greek government and by Euroland member states. It is unlikely that the current Greek government could be regarded by member states as able to deliver that, meaning that some form of emergency national government (as in 2011-12) would be necessary.

Our central view remains that a deal will be done but that’s looking increasingly hopeful and to happen the Greek government, or the electorate, would need to move fast to avoid a more serious financial outcome in late July. And there’s a logistical risk that once the current bailout expires on Tuesday (30th June), the ability of the players to bring about a resolution will be impaired. But as Mrs. Merkel has stated, ‘Where there’s a will, there’s a way’.

Meanwhile the introduction of a bank holiday and capital controls could mark a deterioration in conditions and for the Greek economy, a dodgy financial system and enormous political uncertainty at the start of tourist season is likely to be very negative leaving the recession and its pernicious effects on government revenues likely to deepen.

In terms of the broader Euroland position, in financial terms, a key risk is the banking sector because although the asset side of Euroland banks’ balance sheets are now relatively immune from Greece (apart from the ECB), contagion could spread  through  the  liability  side  of  the  balance  sheet. Greece is the second euro area economy to impose bank holidays and capital controls on its banks and investors and depositors in other peripheral banks may choose to cut some financing in order to mitigate the risk of similar circumstances happening there. A tightening in credit conditions for banks would do much to reverse the easier financial conditions of the past nine months, which have been a key factor behind the recent improvement in growth.

That risk would clearly be rendered more acute – and markets would become more sensitive – to any political channels of contagion. Increases in support for other extreme left- or right-wing parties in Euroland could frighten investors after the precedent that is now being set in Greece.

And then there’s economic risk. Last year, Euroland business and consumer confidence softened in the wake of heightened geopolitical uncertainty in Russia and the Ukraine, leading recovery to stall. There’s a clear risk that the Greece situation has become sufficiently pernicious to erode confidence in the rest of Euroland again, above and beyond the effects of tighter financial conditions.

As such, these circumstances suggest that there are material downside risks to consensus Euroland economic forecasts. We’ll be watching metrics of financial stress and economic confidence closely.

Meanwhile, markets will be watching for a policy response in the coming hours and days- and a material loosening of policy – for example, a sustained period of larger sovereign asset purchases than under the ECB’s current QE programme – would require evidence of a material deterioration in financial and economic conditions. So an aggressive response tomorrow (29th June) may be unlikely. But the ECB is likely to be very visible in its implementation of current asset purchases, and if it becomes apparent that financial conditions are worsening and economic activity is weakening, market participants should price for a reaction from the ECB.

So the conclusions we can draw are that a truly ‘bad outcome’ in Greece (which is still readily avoided, possibly after one last round of ‘extreme stress’, which we now seem to be entering) would have systemic repercussions, and the key determinant of whether there is a systemic shock is whether the current round of negotiations complete on time. With that looking increasingly unlikely, we can see the need for the market to price for a systemic shock. That suggests that the market will react very negatively to the news on Greece over the weekend, with significant ‘safe haven’ flows and the periphery suffering. Government bonds should benefit from both safe haven flows and also from any significant increase in the size of the ECB’s QE programme. The risk to the trade would be the introduction of EuroBonds or EuroBills as a policy response.

We can also expect a significant spread widening on Monday morning and liquidity close to zero in peripheral markets.

Gilts should benefit from flight-to-quality flows, while market expectations for the timing of the first rate hike will be pushed back. Risk-off positions should perform well in this environment, with gilt yields likely to fall. The risk to this scenario is a strong enough policy response in Europe preventing a systemic shock – or any early agreement by Greece. Don’t hold your breath.

Share

You may also like...

  • Stephen Fitzgerald: Solutions in short supply for IR35 interims Stephen Fitzgerald: Solutions in short supply for IR35 interims 14 Jun, 2017
  • Treasurer’s reflections – Q1: HRA & Counterparties Treasurer’s reflections – Q1: HRA & Counterparties 12 Apr, 2012
  • Neil Mason: Football and pension funds – the need to identify core principles Neil Mason: Football and pension funds – the need to identify core principles 17 Apr, 2019
  • MPC eyes wage inflation as rates stay lower for longer MPC eyes wage inflation as rates stay lower for longer 22 Jan, 2015

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 1 day ago

    The vaccine may help settle cash flows but inflation remains a risk: Sponsored article: Lauren Sewell examines the prospects for long-term borrowing as Brexit settles and vaccines are deployed against Covid-19. On the 9th October 2019 Whitehall sent… dlvr.it/RqZXCr pic.twitter.com/PzgOZOGQ0k

    Room151 1 day ago

    ESG in liquidity: Sponsored article: Gavin Haywood looks at the integration of ESG in Federated Hermes’ money market funds. Federated Hermes has over 300 public sector clients invested in our AAA rated money[...] dlvr.it/RqZX5f pic.twitter.com/E87sBXsay8

    Room151 2 days ago

    New realities of investing cash and liquidity: “What to do now?”: Sponsored article: Brian Buck looks at the “unique challenge” for cash management strategies. As investors assess the ongoing impact of the pandemic on their business, levels of cash and… dlvr.it/RqVbk9 pic.twitter.com/ZElVASmEUV

    Room151 2 days ago

    Extra finance promised by the government receives a broad welcome: Sponsored article: The financial pressures facing local authorities this year continue to pose challenges for council treasurers. While the launch of the UK’s Covid-19 vaccination… dlvr.it/RqTzTF pic.twitter.com/HCjH0pyHR5

    Room151 2 days ago

    A savvy approach to managing your cash: Sponsored article: Caroline Hedges examines the need for active cash management to achieve a higher than average return. Last year saw the already mountainous pile of negative-yielding debt around the[...] dlvr.it/RqTzMK pic.twitter.com/uP0RQYTJLt

    Room151 3 days ago

    Putting alternatives at the heart of multi-asset portfolios: Sponsored article: Nick Edwardson looks at the assets that provide the “most attractive opportunities”. We believe that asset allocation is the primary driver of investment returns and that the… dlvr.it/RqQ2Qt pic.twitter.com/WLBzvRRRUQ

    Room151 3 days ago

    Thriving in the pandemic: Avoiding the stragglers: Sponsored article: George Crowdy looks at the sectors providing opportunities for sustainable investment. Throughout much of 2020, we talked about why sustainable investing has thrived in the pandemic,… dlvr.it/RqQ2NQ pic.twitter.com/dxiPWKFsPl

    Room151 3 days ago

    The development of CCLA’s mental health benchmark: Sponsored article: Amy Browne examines the importance of investing in mental health in the workplace. We are living through a public health emergency in more ways than one. Physical health[...] dlvr.it/RqQ2Jx pic.twitter.com/o6yRSCX3oF

    Room151 4 days ago

    Brexit: What the EU trade deal means for the UK economy: Sponsored article: Hetal Mehta looks at the impact of Brexit on economic prospects. Four and a half years after voting to leave the EU, on Christmas Eve the UK finally[...] dlvr.it/RqLBDt pic.twitter.com/No62srfE8h

    Room151 4 days ago

    Cash dethroned: The quest for liquid yield: Sponsored article: Peter Hunt and George Carne ask how treasury departments can balance the need for yield and liquidity. The massive stimulus and waves of liquidity provided by central banks[...] dlvr.it/RqLBDj pic.twitter.com/05g6Zhu1kU

    Room151 4 days ago

    Richard Harbord: Delayed “capital determinations” make section 25 opinions a new crunch point: The severe pressure on local government budgets now means section 151 officers confront a tricky call on  whether they can make a judgement on the robustness… dlvr.it/RqLBDV pic.twitter.com/vTAbDKFzkI

    Room151 4 weeks ago

    PWLB Consultation: Analysis straight from Dickens: Helen Radall and Paul McDermott present a legal examination of the new PWLB borrowing rules as Charles Dickens might have imagined it. Free and easy PWLB (“Marley” to his friends)[...] dlvr.it/RnmwLq pic.twitter.com/yFxcPrQqEG

    Room151 1 month ago

    Room151’s top stories from a momentous year: 2020 was the year in which local government grappled with Covid-19, funding strains, controversy over borrowing rules and the threat of financial collapse. It has been an exhausting and historic[...] dlvr.it/RnlpZg pic.twitter.com/g3myNyox6J

    Room151 1 month ago

    Tracy Bingham: 2020, a year best forgotten but also one of learning: Many will rush to erase 2020 from their memories but, writes Tracy Bingham, there were also many lessons about finance teams, strategic planning and leadership. 2020: A year we’d… dlvr.it/RnlpY2 pic.twitter.com/m7G1krrtCu

    Room151 1 month ago

    Settlement must address ‘precarious’ local government finances: Dan Bates crosses his fingers for “no nasty surprises” in this week’s funding settlement but argues the “bigger prize” is post-Covid financial certainty. Thursday (17 December) should be the… dlvr.it/Rnj9dG pic.twitter.com/KLKjjuBqJE

    Room151 1 month ago

    PWLB consultation: Big change on the way but there are ‘grey areas’ and opportunities: The consultation on PWLB borrowing has concluded creating a new landscape for funding property acquisition. Our experts look at the implications. Tracie Langley The… dlvr.it/RndRvJ pic.twitter.com/KEqXEBmEfq

    Room151 1 month ago

    2021: Better income outcomes?: Sponsored article: Investors should be mindful of structural challenges posed to income generation as a result of rapid thematic change. Jon Bell looks at the prospects for the coming year.[...] dlvr.it/RndRsw pic.twitter.com/TxVk8aXkMq

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Peer to continue push for new combined authority bond
  • Next story Recruitment: Selecting the best possible finance staff

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK