6th July 2015
– Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel have reportedly spoken by telephone and agreed that Greece will put forward proposals to the eurozone summit tomorrow.
– It is understood that Greece will push for a 30% debt “haircut” in Tuesday’s talks.
– This BBC graph shows that Germany has the most to lose should its loans to Greece be written off.
– Euclid Tsakalotos has been strongly tipped to take over as Greek finance minister following the resignation of Yanis Varoufakis today. Tsakalotos has been one of the negotiating team involved in bailout talks with Greece’s creditors.
– Christine Lagarde, the head of the International Monetary Fund says: “We are monitoring the situation closely and stand ready to assist Greece if requested to do so.”
– Greece’s banks will remain closed for several more days, Reuters reports.
Yesterday’s decision by the Greek people to vote ‘no’ to proposed austerity measures has plunged the eurozone into “a new reality”, AXA’s chief economist has warned.
In a conference call with journalists this afternoon, Axa group economis Eric Chaney said: “It was not really in our scenarios, such a large victory for the ‘no’ and this is a new reality that has to be taken on board.”
He said the result means that the Greek government has a stronger bargaining position with creditors, but at the same time Chaney warned that it might reinforce the view among some Europeans that the Greek people are not consistent because they want to stay in Europe, but don’t want to accept the conditions.
However, Chaney argued that Greece and its creditors have been forced to go back to the negotiating table and that both sides would need to consider a compromise in their position and that the evidence suggests this is already starting to happen.
“The fact that Yanis Varoufakis was asked to resign by the Prime Minister is a sign of good will.” He The fact that the Greek national bank, the Bank of Greece, the central bank will be part of negotiations, is also a piece of good news and a sign of good will. The fact that Hollande and Merkel have this meeting tonight is a sign that they want to move and to do it in a co-ordinated fashion,” said Chaney.
Yet he noted that there “is not a lot of margin for further negotiations”. He warned that: “On the Greek side, as it is clear that the people have not agreed to conditions, even if the government considers that the Juncker proposal might be a good starting point, it would be difficult for the government to accept things that have just been rejected.”
On the lenders side, Chaney argued that it is very difficult to see how lenders could back down and agree to a bailout without “very solid guarantees that the reforms that are needed to bring this country back to fiscal sustainability, are implemented”.
What do the coming days and weeks hold?
Greek banks will not reopen tomorrow, said Chaney. If the European Central Bank agrees to a slight increase in the financial lifeline it has extended to Greece, known as the Emergency Liquidity Assistance, then Chaney believes that the bnaks may begin to allow very low withdrawals of around €20 per day.
July 20 will be a critical day in the saga, as if there is no agreement reached by this point, Greece will default on bonds due to the ECB. “There might be a period of grace of a couple of days or maybe a little bit more, but the fact is that [if Greece defaults on the bonds] it will be unavoidable for the ECB to acknowledge that Greece is insolvent and its banks are insolvent. In that case from a legal perspective and the ECB will have no other choice but to cancel the ELA and consider that all the collatoral that has been used by the Greek banks is almost worthless and that could open the door to a Grexit,” said Chaney.
Chaney believes that negotiating a third bailout within this timeframe is not impossible, but certainly a tall order. He suggested that an alternative might be for the parties to agree a kind of bridging loan in a bid to avert an immediate crisis.
“I am not going to make a bet between a successful negotiation of a third bailout and a Grexit and the reason is it is almost impossible to say at this stage,” he said. “As far as we are concerned we should be ready for both outcomes.”
Chaney pointed out that there would be a substantial difference between a managed Grexit where Greece remains in the European Union and continues to benefit from its legal framework and the worst case scenario of a much more chaotic departure from the eurozone.
Implications for other indebted nations
Chaney believes that eurozone lenders will want to avoid setting a precedent that could leave them open to future difficulties with other indebted nations like Spain.”The danger is [that by giving up too much ground] to the Greek government, the risk of having political change in another country, like Spain, with a situation that could spiral out of control in terms of the politics, is something that they will want to avoid.”
Also speaking on the conference call, Chris Iggo, chief investment officer of Axa Investment Management fixed income, added: “I think even beyond Greece in the longer term, as I’ve said before, it’s evidence that the whole infrastructure of Europe continues to be strengthened so we don’t get a recurrence of these questions and these scenarios in the future.”
Chaney said that, while the outcome of Greece’s protracted negotiations and referendum vote might be concessions on its debt repayments, whatever gains the government makes will have been at the cost of plunging the country into “a very deep recession” and GDP contraction of around 3%.