The clock is ticking for Greece

19 июня 2015, 14:06

Our main scenario is still based on a last minute agreement. Yet, time is running away and the worst case scenario of a default, which was unlikely a few months ago, seems now possible. Here's what could happen.

Key dates

June 30: In case of non-reimbursement of the IMF, rating agencies will downgrade Greece sovereign debt to partial default and this will lead, a few days or a few weeks after, to a downgrade of banks and of all public sector entities. Moody's initially scheduled to revise its rating for Greece on July 31. A bank run is to be feared, with the bank deposits in Greece possibly falling under 100 billion euros. Capital controls could be set up urgently, similarly to what has recently occurred in Iceland and Cyprus.

July 1: The meeting of the ECB's Governing Council could lead the central bank to demand more collateral to maintain the ELA program.

July 8-17: Greece would prove unable to repay its debts (450 million € to the IMF, 11.67 billion yens in loans and 71 million € interests on 3-year maturity bonds issued in 2014).

July 20: In case of non-repayment of 3.5 billion euros to the ECB, the ELA program would be stopped, leading to the nationalization of a widely insolvent banking sector. A new default will de facto be considered as a Grexit. To keep a foot in the Eurozone, the Greek government could seek to introduce parallel currency for a limited period of time (primarily IOUs : government debt with a monetary value) but, without a substantial financial support, the country will ultimately have no choice but to launch a new currency with legal tender in Greece.

Devaluation... just an illusion

In case of Grexit, Greece could implement a monetary devaluation between 50% and 70%. An unprecedented recession - even for the country - would presumably follow the year ahead. In the year after Argentina’s default and devaluation, the recession reached 11%. Such a figure is highly credible for Greece.

Contrary to what Grexit supporters believe, the monetary devaluation is just an illusion and won't allow the country to improve its competitiveness. The devaluation would be efficient if Greece's balance of payment was not structurally in deficit. The imports in volume are three times higher than the exports. In that case, the devaluation is just a symbol of a dying economy and would trigger a humanitarian crisis as unseen since 1945.

The adoption of a new currency to replace the euro could prove particularly difficult. It is not certain that the Greeks will adopt the new currency. Probably, they would be quite reluctant to use it as shown in all the surveys about the country’s Eurozone membership. The worst scenario of several currencies in circulation in the country on a long-term period is arguable. It may happen considering that around 100 billion euros have been withdrawn from the banking sector since the end of 2009 and have been kept in wool socks since then. An important currency black market could then develop, similarly to what can be seen in Argentina or Venezuela. The Greeks would prefer the strong currency - euro - and would get rid of the new one. Gresham's law would work perfectly: bad money drives out good. De facto, that would lead to the "euroisation" of the economy. There is no doubt that Greece would be the main loser if the negotiations with its creditors should fail.

A small cost for European countries

Whether partial or total, Greece's default would not really lead to a deterioration of public finances or tax hikes in European countries. The amount of loans granted to Greece has already been integrated in the calculation of public debt, which means it won't increase immediately.

Greece's default would force European states to refinance the loans on the financial markets. But, considering the very low rate environment and the anticipated higher inflation rate over the next few years, the non-reimbursement of the Greek debt should remain painless for public finances, even for the main contributors like Germany and France.

However, creditors would give up interests of approximately 1.5%. Regarding France, that would have brought an increase of its fiscal income equivalent to the highly contested 75% super-tax on the rich (it would have represented a couple hundred million euros each year).

A limited economic and financial contagion

Finally, the risk of an economic and financial contagion at the European level is limited, given the fact that private sector's exposure to Greece is very low. 85% of the Greek debt is in the hands of public entities. European banks have no more Greek sovereign debt, or in negligible amount. As for French banks, their exposure is limited to a couple hundred million euros of Greek corporate debt. Since 2010, the implementations of internal contingency plans to face the Greek sovereign risk and higher prudential ratios have helped immunizing the European financial industry.

However, short term excessive speculation from hedge funds against most indebted European states or most fragile banks can't be ruled out. In that perspective, Italy should be first in line, given its very high public debt and its fragmented public sector. As for now, the increase of Southern European rates during the last few weeks can't be regarded in any way as a proof of contagion: it's only a sign of normalization. Investors are now integrating the risk factors after a period of abnormally low rates.

In any case, a contagion would easily be stemmed by the ECB's action. It can't be ruled out that the central bank would temporarily increase its asset purchases on the secondary market. The limited bond market size in Europe should allow a temporary control of the market and hedge fund attacks would soon come to an end.

On the other hand, it remains difficult to estimate the political impact of Grexit. The polarisation of public opinions in Germany, Denmark, Spain or Finland and the perspective of Brexit reflect the fact that there hasn't been any shared project in Europe for a long time. The exit of Greece from the euro could act as a trigger and lead Europeans to get aware that they have no more common interest, destiny or will to live together. The real issue of the Greek case is certainly not economic but political. Greek Prime Minister Alexis Tsipras clearly understood that and wants to bring the question of the Greek debt at the political level on the occasion of the next European Council which will take place on 25 and 26 June. In other words, don't expect anything from the Eurogroup meeting on June 18.

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