Tuesday, June 30, 2015

What’s the Timetable to a Grexit?

2:01 pm EST Jun 30, 2015

  • We are in the climax of Greece’s debt crisis. It has been a slow-burn crisis, a five-year-long string of high-drama confrontations amid tedious talks. These next three weeks are crucial. The endgame is July 20, when Greece must repay a bond to the European Central Bank.
    Barring a last-minute U-turn by Greek Prime Minister Alexis Tsipras to accept the economic policies that Greece’s creditors are demanding as the condition of further bailout loans, here is how that endgame would look.
    • What happens today, June 30?

      The bailout program officially expires and a payment of €1.55 billion ($1.73 billion) to the IMF falls due.
    • Does that matter?

      Barring a magical rabbit springing from a hat, Greece will miss the IMF payment. The IMF will be mad, but the missed payment has few practical consequences. The eurozone bailout fund has the option of declaring Greece’s rescue loans in default and demanding accelerated repayment, but that would be a nuclear option it likely wouldn’t exercise—at least not right away. The bailout fund is controlled by eurozone finance ministers.
    • What about the bailout program expiry?

      Here’s where it gets tricky. Expiry could change the European Central Bank’s view on its emergency lifeline to Greek banks. The banks are Greece’s biggest vulnerability.
    • How so?

      Greek banks have relied for months on emergency lending from the central bank. They have scant cash and few assets they can quickly sell, so when a depositor asks for a withdrawal, they must borrow from the central bank to be able to give the depositor cash.
      Greeks have made €35 billion in withdrawals this year through May, the most recent available data. Non-Greek banks have pulled nearly another €30 billion of loans. The Greek banks have less than €2 billion in cash.
      On Sunday, the ECB froze the emergency lifeline at around €89 billion. Unable to get more cash to give to depositors, banks shut Monday. To reopen the banks, that lifeline needs to be turned back on.
    • Will it?

      It is difficult to imagine the ECB increasing the lifeline without the Greek government and the European creditors agreeing to a deal.
      The ECB is right now taking a middle course. Since banks need more money every day to cope with withdrawals, freezing the lifeline shuts the banks but doesn’t kill them. The lifeline comes in the form of loans to the banks that are regularly renewed; in effect, the ECB is saying you can’t have any more loans but we’ll keep renewing the ones you have.
      The tougher course would be to end the lifeline entirely and demand that the loans be repaid when they come due.
    • Why might the lifeline end?

      The lifeline, called Emergency Liquidity Assistance, or ELA, is highly flexible. The rules say that the banks receiving it must be “solvent,” but otherwise the ECB has broad latitude. The ECB also doesn’t lend for free—it has required the Greek banks to post assets as collateral to get ELA.
      So two things could kill the lifeline: Insolvency of the banks, or a determination that the collateral they are posting isn’t adequate. Let’s take them one at a time.
      By the books, the Greek banks are solvent. They have assets, primarily in the form of loans, that exceed their liabilities, primarily deposits and central-bank lending.
      That, of course, could change—perhaps many of their loans need to be written off or reduced in value. Perhaps the deferred tax assets (basically, promises that they’ll get tax refunds or credits in the future from the Greek government) they hold aren’t worth as much as they imagined.
      The banks don’t have heavy holdings of Greek government debt: €13.8 billion out of a total assets of nearly €400 billion—even if that debt went to zero the banks would probably remain solvent.
      Collateral is another matter. The ELA is secured by a hodgepodge of collateral: some of the banks’ loans, some covered bonds, a little bit of government debt. For the four big banks, though, a special kind of government-guaranteed bond makes up a large chunk of the collateral.
      That means to keep ELA going, the ECB must primarily assess whether the government’s guarantee is solid enough to make the collateral adequate. It’s a judgment call.
    • So would bailout expiry end the lifeline?

      Probably not, especially when there is a referendum scheduled in five days. The ECB is loath to be seen as interfering in politics. The formal end of the bailout program doesn’t directly affect the banks’ solvency. Some on the ECB’s board might argue that it hurts the government’s guarantee and thus the adequacy of the special bonds. But the ECB could credibly keep the lifeline frozen at least through the referendum.
    • How much longer?

      July 20. That day, €3.5 billion in Greek-government bonds held by the central bank fall due. If Greece doesn’t pay, the ECB would be hard-pressed to keep ELA alive. An actual payment failure makes the judgment call about the government’s guarantee much clearer.
    • What happens if ELA is ended outright?

      The banks collapse as soon as the ELA loans come due. The banks cannot repay them. So the collateral they posted would be seized. They posted more than a euro in collateral for each euro in lending, and thus they collapse.
    • When would the famous “Grexit” come?

      Right around then. It could be as soon as July 21, if the loans granted under ELA are overnight loans (the exact maturity isn’t known). If the banks have collapsed and there is no central-bank support, the government would have to create a new currency to restart the financial system and make payments.
    • Can it be avoided?

      Yes, but time is excruciatingly short. The referendum is July 5. If there is a “Yes” vote, Mr. Tsipras has hinted he would resign. A new government would need to be formed, a deal signed, legislation passed and money disbursed from the creditors in time to make the July 20 payment.
      If there is a “No” vote, Mr. Tsipras would presumably try to negotiate a better deal on the back of the popular support. And again, a deal would have to be reached, legislation passed and money disbursed by July 20.
    • Could the ECB forestall Grexit at the last minute?

      If it wanted to be really, really, really nice it could come up with a way to overlook a missed July 20 payment. Perhaps it could invoke a grace period. And Standard & Poor’s, the rating firm, has said a default on the ECB-held bonds would not be enough to place the Greek government in default. (S&P says its ratings reflect a borrower’s repayment of commercial creditors only.) Perhaps that’s enough cover for the ECB to say the government’s guarantee is still good.
      But these are Hail Mary passes highly likely to be swatted down by the ECB’s board.

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