Greece: The ECB and Greece’s Future in the Eurozone

Published on July 6, 2015

The most immediate question in the aftermath of the resounding “No” vote in the Greek referendum yesterday is what the European Central Bank will decide on ELA funding for Greek banks at its publicly announced meeting today.

*** We would be very surprised if the ECB increases ELA funding for Greek banks, despite the intense pressure on the banking system and despite immediate calls from Athens on Sunday for exactly that, especially now after capital controls have been imposed. We would likewise be equally surprised if they were to cut back on ELA funding on the eve of a political Eurogroup meeting and summit that could still keep aid negotiations with Greece alive. ***

*** The ECB decision today whether to finally tighten the collateral requirements on Greek assets put to the central bank, is less clear. Frankly, with the Greek banking system frozen under capital controls, such a decision at this point may matter less than it would have in the past. But we suspect (albeit with a less conviction) the ECB is also likely hesitant to throw this wild card into the fray before tomorrow’s summit as well. ***

*** While the ECB actions today may seem like a technically neutral decision, in practice it will keep enormous pressure on the Greek banks, and by extension, on Greek Prime Minister Alexis Tsipras in shaping his latest proposal. ***

Tsipras’ “New” Plan on Tuesday

The fundamental question that will determine Greece’s position in the Eurozone now is whether Tsipras comes back tomorrow with a cobbled together plan that at least appears to provide enough political concessions to give cover for the EU to keep talks still alive on avoiding a Grexit. In concrete terms, that would mean an eventual disbursal of funds that will allow the ECB to continue to support the Greek financial system.

But he may also opt to push his electoral victory so hard that it negates whatever slim domestic political capital German Chancellor Angela Merkel and fellow EU leaders have remaining to fund a third bailout program for Greece. That challenge at this point should not be taken lightly.

And to be clear, that means funding beyond humanitarian assistance, structural cohesion funds, and other measures that will be granted in any case to prevent a complete disorderly transition from the Euro were it to come to that, despite all assurance otherwise.

Initial indications from Athens have been that Tsipras may latch on to last Monday’s “Juncker Plan” that laid out a step by step, piecemeal path towards an actual October debt renegotiation timeframe in exchange for partial completion of reform. At the time, however, EU officials flatly denied the so-called Juncker Plan was an actual proposal as it went well beyond what Member States were willing or ready to agree to (see SGH 6/30/15, “Greece: Still Looking for Better Terms”).

While that may prove some sort of “basis” for discussion for release of a new ESM fund program, the key again, politically, will be in how aggressively Tsipras rides his new “mandate” on the fiscal negotiations, or whether he will be ready to latch onto a political victory of successfully now pulling the debt renegotiation debate to the forefront with specific commitments and a timeframe.

Depleted Goodwill

And he will have to tread lightly. While the 60-40 vote margin of rejection of the EU program last night certainly raised eyebrows across the Eurozone, the political goodwill for a debt agreement before reforms appear to have all but gone – not that it was ever there – and the question will be whether negotiations produce enough give on both sides to stage a rapid fiscal measures for debt relief sequencing that will fly on both sides.

Finally, the ignominious sacking today of Finance Minister Yanis Varoufakis was of course probably one of the clearest conciliatory gestures Tsipras could present to the EU at this point (see SGH 6/1/15, “Greece: Strains within Syriza”). But it will be what happens starting with the negotiations tomorrow that will be critical to Greece’s future within the Eurozone.

Markets are looking now at July 20 when a 3.5 billion Euro payment to the ECB comes due as the next effective “deadline” for negotiations. But we believe the real deadline will come much sooner: the intense pressure on the banking system and the urgent need for clarity as soon as possible on whether Tsipras will now indeed embark on discussions that could open up the ESM and EU to additional funding will make these next few days the critical decision points for Greece

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