Greece: Capital Controls Imminent

Published on June 18, 2015

In previous reports we have laid out various road maps presented by EU officials for reaching if not a full agreement, at least a working group level agreement allowing for a temporary extension of Greece’s bailout program that expires on June 30. Today’s report in a German paper of a proposed bridge deal (sans IMF) appears to be a hybrid version of those old proposals, including suggestions we have previously written about for using EFSF/HFSF money to fund a bridge through at least the summer.

But those proposals have all been predicated on the willingness and ability of the Greek government of Alexis Tsipras to deliver material concessions on a budget that would meet mutually agreed loosened primary budget targets. And that has not happened, with the Greek government holding out to see whether the EU is willing to firm up its 2012 promise of unspecified potential debt relief if Greece completed the requirements of its existing bailout program before it offers further fiscal concessions, if any.

*** Indeed, while there has been no official response yet to the latest proposal presented by Finance Minister Yanis Varoufakis to the Eurogroup meeting today, we strongly suspect those also continue to fall into the category of too little, too late at this stage of the exhaustive negotiations. The Greek government is instead sticking to its demands to negotiate on debt in return for marginal movement on the fiscal side. That will not happen, and the Monday Heads of State Summit just called by European Council President Donald Tusk will, we believe, be as much about emergency planning from here on as a last ditch attempt at averting a Greek default. ***

*** We also believe the reports earlier today in the Greek media that the EU is preparing to firm up its commitment on debt relief beyond what was promised in 2012 are wildly off the mark. Beyond reiterating the 2012 commitments to revisit Greece’s debt structure under conditions that Greece already has failed to meet, and remaining open to the possibility of debt relief if and when appropriate at some point, our understanding continues to be that any concrete, proactive concession on debt will simply not happen at this point. An offer from the EU of changes to Greece’s debt profile, if it is to come at all, will happen only after there is substantial agreement on Greece’s budget, and in context of a third program that Greece has not even asked for. That means on the political level, Tsipras at this point cannot and will not be given yet another concession without delivering significant concessions on his end. ***

*** And time is almost all but run out on the clock. As the June 30 deadline approaches, and with the ball now squarely in Greece’s court, Eurogroup discussions are increasingly turning to the potential implications and need for planning in case of a failure to reach an agreement for even an extension with Greece. And while Greek government spokesperson Gabriel Sakellaridis just today firmly denied that capital controls were on the table – the decision to impose controls is indeed up to the sovereign state and will not be actively “triggered” so to speak by the EU or ECB – the European Commission from what we understand is preparing the legal framework under EU law to approve what is seen as the increasing likelihood of potential imminent capital controls. Even as the Greek government attempts to exude confidence in a last minute deal being struck, the outflows from the banking system have been, to say the least, severe. ***

The negotiating atmosphere if anything has been poisoned by the Greek Parliament’s latest salvos against the “criminal” IMF and “odious” EU bailout program. And while the European Commission just might continue to attempt to broker a last minute budget deal between the various sides, perhaps incorporating some savings on defense spending as has been speculated in the press, even with savings from defense spending (which might lose ANEL support in parliament anyway), the fiscal gulf will still have to be closed with further substantial commitments on the Greek side on pension reform.

In the meantime Varoufakis has been wasting precious time presenting alternative proposals to OECD Secretary-General Angel Gurria, proposals that are completely irrelevant and a sideshow distraction if anything to the negotiations with the Institutions, while Tsipras negotiates gas deals with Russia. The real concern now is whether in this latest round of “game theory” the leadership of Athens has significantly underestimated the willingness or ability of the EU to allow Greece to enter uncharted territory if it does not take concrete steps to move towards a deal. We believe they have.

We have for some time maintained that a full agreement is all but impossible before the June 30 deadline, with the only hope being for enough of an agreement at a working group level to allow for an extension of discussions through the summer.

While that is still possible, the odds for it happening are now rapidly shrinking, and we believe there is a more than even chance now Greece will need to impose capital controls as soon as next week.

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