Can Greece Default and Keep the Euro?

How things could develop

Photographer: Jim Dyson/Getty Images

While the risk of Greece missing a debt payment in coming weeks is rising in the absence of an agreement with creditors, this may not necessarily lead to default, or euro exit, at least not immediately, analysts say.

  • Some officials already alluded to this possibility, with ECB’s Constancio telling European lawmakers a default doesn’t automatically mean Greece must give up its euro membership, and economic affairs commissioner Moscovici ruling out preparing plan B in case of Greek failure.
  • Greece can continue on without a deal until possibly late July when ECB loan repayments come due, analysts from HSBC to BofAML say; capital controls and a parallel currency may allow the country to carry on for a few months before reality sinks in.
  • Here is a potential sequence of events:
  • CASH SHORTAGE

    • There’s little clarity whether Greece can drum up enough funds from local authorities to meet its commitments in May; Kathimerini newspaper reports the govt needs an additional €400 million to pay salaries and pensions this month.
    • Mid-May may well be “crunch time” for any Greek resolution, as May 11 Eurogroup meeting coincides with another payment to the IMF the following day, Bank of America Merrill Lynch analysts wrote in note dated April 20.
    • Greece may have enough cash to meet May 12 payment to IMF after requisitioning local govt funds, writes Chris Attfield, strategist at HSBC; “hard deadline” is July 20, when bond held by ECB comes up for redemption.
    • Only certainty is Greece won’t be able to pay ~€7 billion in interest payments and bond redemptions to the ECB in July and August without a deal, analysts at BNP write.
  • A “SOFT” DEFAULT

    • Medley says it’s possible Greece could default with the acquiescence of its creditors provided Alexis Tsipras’s government is cooperative on fiscal targets.
    • Key issue is whether or not a missed payment to the IMF would automatically trigger a suspension of ELA, according to BofAML analysts.
      • There are ways to keep Greek financial system minimally functional even after a missed payment for some time, according to BofAML.
      • A missed IMF payment would technically be considered a default by IMF board only after 30 days.
      • ECB may “look the other way” for some time as the monetary policy branch that decides on ELA doesn’t assess the solvency of the banks; level of forbearance from creditors will depend on political developments.
    • Although it’s possible a missed IMF payment wouldn’t constitute default, the EFSF could still decide to call in its loans, Citigroup says.
    • Publicly all parties say there is no deal to allow Greece to miss a payment to the IMF or default, a senior Greek government official said.
  • ECB and ELA

    • ECB would be more likely to suspend ELA in case of a missed payment on ECB loans, HSBC’s Attfield writes.
    • Cutting off ELA would be fastest route to an exit, UBS analysts Justin Knight and Nishay Patel write.
    • ECB is said to discuss raising haircuts on Greek collateral on May 6, same day Greece has to to pay back €201 million in IMF loans interest.
    • Coeure said failure to repay debt in a timely manner could “make it more difficult for banks to obtain liquidity”.
    • JPMorgan economist Malcolm Barr says legal framework doesn’t give much clarity on what the central bank would have to do in such an event.
      • Unlikely ECB would take this step without political backing, Barr says.
    • Fitch analysts say comments from ECB speakers suggest a restriction of ELA isn’t certain on a default.
  • CAPITAL CONTROLS

    • If the ECB did choose to cap ELA, it could spur Greek authorities to impose capital controls to prevent further deposit outflows, Barr says.
    • This needn’t escalate an exit either and this “frozen conflict” where capital controls are in place, official debts aren’t being paid, and the economy worsens could last for months.
    • Credit Suisse analysts say capital controls add to contagion risk via the banks; for now, stock markets remain sanguine as exposure to Greece has been cut.
      • Greek lenders outside of Greece have been ordered to exit all exposure to Greek state bonds and treasury bills.
  • IOUs

    • Ultimately, the government may have to introduce a parallel currency, such as IOUs, for certain payments.
    • BofAML analysts say this is only likely to provide a temporary bridge as IOUs come with their own problems e.g. not being legal tender outside of Greece and may lead to capital outflows.
      • Such a move also runs the risk of further weakening support for the govt at home; around 1 million Greek workers already face delays of up to 5 months in their salaries.
    • Purchasing value of IOUs would probably be lower than that of euro, meaning they would be effectively devalued, UBS analysts, including Knight, write.
      • Introduction of IOUs, as they grow in number, would make an exit a fait accompli in a practical sense at some point.
  • NEW ELECTIONS, A REFERENDUM

    • Over time this limping along approach would likely significantly increase pressure on Greek government, making fresh elections, or at least a referendum on EU membership, increasingly likely.
    • Citigroup says a vote could come sooner if the govt were to choose to push ahead.
    • Tsipras says Greek voters could be asked to decide on whether to approve an agreement that violates his campaign pledge to end austerity, though he’s confident it won’t come to that.
    • Becoming “increasingly convinced” that Tsipras’s solution if there is no deal to release aid funds in next few days would be to call elections, RBS strategist Michael Michaelides wrote in a note Friday; given strong Greek public support for euro, a probable Syriza victory with a new mandate to strike a deal will ultimately prove positive to finding a final agreement.
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