Greek state of play: economic comment 29 June

Last Saturday, 27 June, 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 30 of June. As the 30th is also the deadline for a EUR 1.6 billion IMF repayment, Greece is most likely to miss that payment.

Risk of a bank run

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. The risk of a bank run increased because cash stricken Greek banks were no longer able to access additional Emergency Liquidity Assistance (ELA) from the ECB. This because the ECB has made ELA contingent on the prospect of a deal between Athens and its debtors. Now that this prospect is waning, it is unlikely that the ECB will increase the available ELA in the short term. 

Contagion risks financial markets

Rabobank’s Economic Research department does not foresee major contagion effects for other countries with issues similar to those in Greece. They see four reasons for this:

  • 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 capitalised than in 2010, have no sovereign exposure in Greece and their overall exposure to Greece is relatively small (EUR 29 billion end of 2014).

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