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Greek state of play

Economic Comment


Tsipras’ last minute R-turn

Last Saturday (June 27), the Eurogroup discontinued negotiations on an extension of the bailout programme after Greek Prime Minister Tsipras announced he would hold a referendum on the reform package tied to the bail-out package. Germany’s red line was that, in order for Greece to receive the last bailout tranche, all the reforms would have to be passed by the Greek parliament. A referendum on the reforms scheduled for Sunday the 5th of July next week certainly does not comply with that demand, as the deadline for a decision on the bailout tranche is the 30th of June. As the 30th is also the deadline for a €1.6 billion IMF repayment, Greece is most likely to miss that payment.

The discontinuation of the negotiations concluded a roller coaster ride that lasted throughout last week. Last week started on a positive note, as after weeks of virtually no progress on the talks the Greek side budged and submitted a new proposal for reforms which struck a more positive chord with EU leaders last week Monday. A document on Wednesday showed that exceptions proposed by the Greeks were virtually all rejected by the IMF. Without these exceptions it would have been very difficult for Tsipras to get the deal approved by his own coalition in the Greek Parliament given the skepticism of his own party Syriza and coalition partner Anel. The announcement of a referendum can be interpreted as a way to secure his own political survival. However, the referendum carries a negative advice from the Greek government which led the Eurogroup to interpret it as a Greek withdrawal from the negotiations.

The week ahead

Looking ahead, Greece faces enormous uncertainty in the coming weeks. On Monday banks remained closed and the rest of the week depositors can only withdraw 60 euro a day per account, as a bank run is difficult to avert under the current scenario; cash stricken Greek banks will not be able to access additional Emergency Liquidity Assistance from the ECB. This because the ECB has made ELA contingent on the prospect of a deal. Now that as this prospect is waning, increasing the available ELA is unlikely, which underlies the decision to keep banks closed through the week.  

Capital controls are necessary as banks face liquidity shortages, but other crisis measures are highly dependent on the choices made by the Greek government in the coming week as well as the referendum outcome on Sunday. It is good to note that the Greek people may still vote to implement the reforms proposed by the creditors. However, that decision would come five days late for the IMF payment to be honored and Greece may thus already be in default at that time. That said, if the creditors show leniency on the timing of the repayment, a formal default may still be averted. If the Greek people vote against the deal with the institutions, a default is imminent and a Grexit scenario becomes the most likely scenario.

Greek exposure

If Greece defaults on its debt there will be direct and indirect effects on other countries. The direct effects are limited to losses for the holders of sovereign debt. Figure 1 shows how since 2010 private creditors have reduced their exposure on Greece considerably. The lion’s share of the public debt is now held by the EFSF, the ECB and the IMF. This means that financial stability in the Eurozone is not directly threatened by a Greek sovereign default. European countries will face an increase in their debt levels if they have to take a loss on Greek public guaranteed trough the EFSF or held by the ECB.

Figure 1: Holders of Greek public debt
Figure 1: Holders of Greek public debtSource: BIS, Rabobank

However, the total Greek debt but amounts to on average three and a half percent of Eurozone GDP, a figure that is unlikely to tip any country over the edge, particularly with the ECB as a major buyer of sovereign debt under its quantitative easing program. The impact of a sovereign default is broader when that precipitates a Grexit. Eurozone banks may have to take losses on their loans to Greek banks and companies. In recent years banks have reduced their exposure on the entire Greek economy (i.e. sovereign and private sector combined) from €90 billion end of 2010 to around €29 billion end of 2014. This is exposure is split 50-50 between Greek banks and the private sector. Though sizeable, this exposure is spread over many banks in several European countries and will probably not threaten financial stability in the Eurozone.

Contagion risks financial markets

A Greek default or Grexit will inevitably lead to financial markets reactions and these are difficult to predict. Previous crises have shown that other countries similar to the country in trouble can become the target of speculation. The most obvious euro area targets in this case would be Cyprus, Portugal, Italy and possibly Spain.

We do not foresee major contagion effects for these countries for a number of reasons:

  • Firstly, the Eurozone now has the ESM fully up and running, ready to step in in case of a loss of confidence in a Eurozone country.
  • Secondly, the ECB has been pursuing QE since January, which means a smaller share of public debt has to be refinanced on the market in the next few months.
  • Thirdly, the ECB now has the OMT programme on standby to start buying government bonds in the case of a speculative attack.
  • Fourthly the risk that banks in the Eurozone face losses on Greek exposure which erodes their capital base and / or precipitates saving by their national government is small. Eurozone banks are better capitalized than in 2010, have no sovereign exposure in Greece and their overall exposure to Greece is relatively small (€29 billion end of 2014).
Jurriaan Kalf
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 88 726 7864
Maartje Wijffelaars
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2257 0569

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