Greece's Euro Exit Seems Inevitable - page 12
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Germany's Oettinger says Grexit not the aim, but will happen if no deal before 30th J
EU commissioner and CDU party member on the wiresFirst Greek headline off the rank today. Certainly not the last
And of course, Greek PM Alexis Tsipras has just called for a referendum on euro membership to be held next Sunday.
Draw your own conclusions.
It's 2 In The Morning And Greeks Are Lining Up At ATMs; Alpha Limits Online Banking
Tsipras calls a referendum on EU bailout proposals
Returning home to Athens last night Greek PM went on television around midnight to declare a referendum on the current proposals from creditors
Greek parliament is convening shortly to approve the call which has been set for July 5
Tsipras said
"Our responsibility is for the future of our country. This responsibility obliges us to respond to the ultimatum through the sovereign will of the Greek people"
adding that he would respect the outcome of the referendum but said the lenders demands
"clearly violate European social rules and fundamental rights, would asphyxiate Greece's flailing economy and aimed at the "humiliation of the entire Greek people".
Greek govt ministers are confident of a No vote but this surprise move throws the whole process now into further turmoil with default and capital controls very much in play
The meeting of EU fin mins is going ahead as planned and will be underway shortly with German deputy chancellor Sigmar Gabriel on radio a short while ago urging Greece to at least agree a deal for the nation to vote on
"We'd be well advised not to dismiss this suggestion from Herr Tsipras out of hand and say 'that's just a trick'," "But rather if the questions are clearly framed... then that could make sense."
Either way the Greek PM has now raised the stakes in this drawn-out game of bluff and we wait on the EU response. There's a lot more to run on this before markets re-open tomorrow
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I have a feeling that Troika is still hoping that this is a dream - they behave like sleepwalkers unaware of what is going on around them
I have a feeling that Troika is still hoping that this is a dream - they behave like sleepwalkers unaware of what is going on around them
There will be more "clever explanations" - but it is up to a referendum now. In any case EU lost
Greece End-Game: 40% To Grexit, 40% To Contagion – UBS
Equal chances to a Greek exit of the euro-zone and contagion to other countries, according to the team at UBS.
The crisis significantly escalated over the weekend and banks remain closed in Greece. So, here goes:
Here is their view :
Forecasting Greek developments and their market impact has been a humbling exercise and it just got more difficult, notes UBS.
“Our framework is to tie two medium-term probabilities and one outcome together for this week. We examine the current dynamics around a) the probability of Grexit and b) the probability of contagion,” UBS adds.
A 40% probability to Grexit:
“The layers of uncertainty involved make an ex-ante guess of the probability of Grexit a very tricky task. Dissecting the different layers of uncertainty, however, helps us compute what we consider to be a reasonable probability of the event: 40%,” UBS argues.
“There is one key factor that lowers the odds of Grexit down to about 40%. According to the relevant studies, the history of polls shows that a change from the status quo leading to worse outcomes for the population tends to be voted down in most cases. In the case of Greece, these worse economic outcomes will be increasingly visible from Monday onwards,” UBS clarifies.
A 40% probability to Contagion:
“According to our best assessment, the risk of severe contagion stemming from a potential Grexit is currently c.40%. This judgement is based on our assessment of three dimensions: firstly, the size of the Greek economy and its external debt; secondly, the external linkages; and thirdly, the likely policy response. Given the relatively small scale of the Greek economy and limited external links, we suspect the key risk might be around the timeliness and credibility of policy response,” UBS argues.
“Currently, we see c.60% probability of a swift and completely effective response from the authorities. But if market reactions were to show distress, then we believe the likelihood of effective policy reaction would increase,” UBS adds.
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ECB Says "Grexit Can No Longer Be Excluded", Hints At More QE
It seems Goldman Sachs' conspiracy theory was right all along...
ECB'S COEURE SAYS ECB IS EVEN READY TO USE NEW INSTRUMENTS, WITHIN ITS MANDATE
GREECE COULD EXIT EURO, COEURE SAYS IN LES ECHOS INTERVIEW
This is exactly what The ECB wanted all along (and their leaders overlords) - all they needed was an 'excuse'.
* * *
As we noted previously, from Goldman:
As tensions around Greece have mounted, it is something of a puzzle that EUR/$ has shown little reaction. Our explanation, laid out in our last FX Views, is that much of this price action stems from the Bundesbank, which has reduced the maturity of its QE buying, enabling the Bund sell-off and moving longer-dated rate differentials in favor of the Euro. EUR/$ thus hasn’t traded Greece, but instead growing question marks over ECB QE.
Here is Goldman's full take:
From an economic perspective, Greece shows that “internal devaluation” – whereby structural reforms are meant to restore competitiveness and growth –is difficult politically and a poor substitute for outright devaluation. Emerging markets that devalue during crises quickly return to growth, powered by exports, while Greek GDP continues to languish. We emphasize this because – even if a compromise involving a debt haircut is found – this will not do much to return Greece to growth. Only a managed devaluation, with the help of the creditors, can do that. With respect to EUR/$, we think the Bund sell-off increases EUR/$ downside if tensions over Greece escalate further. This is because the ECB, including via the Bundesbank, would almost surely step up QE to prevent contagion. We estimate that the immediate aftermath of a default could see EUR/$ fall three big figures. The ensuing acceleration in QE would then take EUR/$ down another seven big figures in subsequent weeks. We thus see Greece as a catalyst for EUR/$ to go near parity, via stepped up QE that moves rate differentials against the single currency.
Incidentally, "internal devaluation" is a very polite way of saying plunging wages, labor costs, and generally benefits, including pensions.
But if this is correct, Goldman essentially says that it is in the ECB's, and Europe's, best interest to have a Greek default - and with limited contagion at that - one which finally does impact the EUR lower, and resumes the "benign" glideslope of the EURUSD exchange rate toward parity, a rate which recall reached as low as 1.05 several months ago before rebounding to its current level of 1.14. Needless to say, that is a "conspiracy theory" that could make even the biggest "tin foil" blogs blush.
A different way of saying what Goldman just hinted at: "Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE)."
Or, in the parlance of Rahm Emanuel's times, "Let no Greek default crisis go to QE wastel."
Goldman continues:
Greece, like many emerging markets before it, is suffering a balance of payments crisis, whereby a “sudden stop” in foreign capital inflows caused GDP to fall sharply. In emerging markets, this comes with a large upfront currency devaluation – on average around 30 percent across nine key episodes (Exhibit 1) – that lasts for over four years. This devaluation boosts exports, so that – as unpleasant as this phase of the crisis is – activity rebounds quickly and GDP is significantly above pre-crisis levels five years on (Exhibit 2). In Greece, although unit labor costs have fallen significantly, price competitiveness has improved much less, with the real effective exchange rate down only ten percent (with much of that drop only coming recently). This shows that the process of “internal devaluation” is difficult and, unfortunately, a poor substitute for outright devaluation. The reason we emphasize this is because, even if a compromise is found that includes a debt write-down (as the Greek government is pushing for), this will do little to return Greece to growth. Only a managed devaluation can do that, one where the creditors continue to lend and help manage the transition.
Here, Goldman does something shocking - it tells the truth! "As such, the current stand-off is about something much deeper than the next disbursement. It signals that the concept of “internal devaluation” is deeply troubled."
Bingo - because what Goldman just said in a very polite way, is that a monetary union in which one of the nations is as far behind as Greece is, and recall just how far behind Greece is relative to IMF GDP estimates imposed during the prior two bailouts...
... simply does not work, and for the union to be viable, a stressor needs to emerge so that broad currency devaluation benefits not only the peak performers, i.e., the northern European states, but the weakest links such as Greece.
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Grexit More Likely, But GRIN Remains Our Base-Case – RBS
As the euro slides again on deadline day for Greece, there are many open questions next.
Will Greece leave the exit or not? The team at RBS weighs in:
Here is their view :
RBS now sees increased chances of a Grexit, but GRIN (Greece remains in Eurozone) remains its base case scenario.
“If we use a 60/40 probability for a yes/no vote from recent polls, and assume there is still some chance to get back to the Grexit scenario after a yes vote, then we should estimate the Grexit probability at a maximum 40%, up from our 10%-20% previous estimate,” RBS clarifies.
“Grexit is more likely, but GRIN remains our base case scenario. The major issues to unlock the negotiations remain political. The economic cost of keeping Greece remains immensely lower than the potential fallout from an exit. The hardline stance from the SYRIZA government has put negotiations closer to the edge, with the potential for crossing a point-of-no-return in case of a No vote this weekend,” RBS argues.
“The most likely scenario is a Yes, with the ECB extending liquidity to Greek banks and the Eurogroup making its proposal available again upon the vote, and a potential reshuffling of government coalitions, a unity government, or new elections. With a No vote, we enter uncharted territory. The government will probably stay in power, having supported it. But the Greek banks will probably face a liquidity crisis, even if ELA continues to be extended at current levels, pushing the Bank of Greece (or the Treasury) to issue IoUs and bringing Greece one step closer to an Exit,” RBS adds.
“Eventually, it will be the Greek government and the Greek people to decide whether to stay in or out of the Euro, and the majority of Greeks so far wants to stay,” RBS concludes.
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EFSF Confirms Greek Bailout Expires Today
Despite rumors from The Time of Malta (seriously!!), Greece's largest creditor by far - the European Financial Stability Fund (EFSF) - has confirmed that "it's over":
So no extension, no suspension of referendum, and no talks until the referendum is over
And when the result of the referendum is "no". they will say "they did not men no but yes" the same as French and Dutch referendums