The Greek Exit nightmare begins

Greeks reject bailout package
SUBHEAD: Tsipras: referendum result shows 'democracy won't be blackmailed'.

By Mehreeen Khan on 5 July 2105 for the Telegraph -

Image above: Happy Greek women celebrates the referendum "NO" vote that rejected Eurozone conditions of austerity. From original article.

Analysts at Barclays now see a Greek exit as their base case scenario. They say the actions of the ECB are now crucial in the coming weeks but expect July 20 to be the day liquidity is cut off and the banks on the verge of collapse. In such a scenario and without a new bail-out, the government will have to resort to IOUs and new Drachmas to recapitalise the banking system.

From Barclays tonight:
"How long Greece can stay in the euro without a financial assistance programme will depend on the ECB’s willingness to continue to provide liquidity to its banking sector and the consequence of a default on the bonds held by the ECB in its SMP portfolio on 20 July. If there is no agreement on a programme, the ECB will shut down ELA no later than 20 July. Banks will then not only be illiquid but would then turn insolvent. As a result, the lack of financing would trigger a collapse of the Greek economy. This situation could not last more than a few days, beyond which the Greek government would have to decide to take back the control over the central bank of Greece and force it to provide liquidity support to Greek banks, therefore printing de facto another currency. This would clearly be a violation of the Treaty and would certainly put Greece outside the monetary union."
Alexis Tsipras has also now spoken. He says he will convene a meeting of political party leaders on Monday morning. He says the debt issue will now be on the negotiating table but that the vote does not mean a break with Europe.

"With the difficult circumstances prevailing today you made a very brave choice.

"I'm fully aware the mandate you gave me is not one of a rupture with Europe but a mandate to strengthen our negotiating position to seek a viable solution."

"This is not a mandate of rupture with Europe, but a mandate that bolsters our negotiating strength to achieve a viable deal."

European Union faces Domino Effect

SUBHEAD: The Nightmare of the "Euro-Architects" is coming true as they see Greek Eurozone split coming in days. 

By Tyler Durden on 5 July 2015 for Zero Hedge -(

Image above: Angry Greek woman demonstrates support of "NO" on bailout referendum.  From article above.

Perhaps the best summary - or epitaph, some would say - of the shocking events that took place in Greece this afternoon, and the resultant falling dominoes that are about to be unleashed, was given by Slovakia's finance minister Peter Kazimir, who summarized events as follows:
He followed it up with a Dylan Thomas quote:
The nightmare of the 'euro-architects' that a country could leave the club seems like a realistic scenario after voted No today - 0:24 AM - 5 Jul 2015
We will not go gently into this good night. We stand united and we need to respond to this situation as soon as possible  - 10:22 AM - 5 Jul 2015

We assume the next lines goes as follows:
"Rage, rage against the dying of the "irreversible" currency"
And while we laid out what Deutsche Bank's 4 possible scenarios are in the case of the now confirmed "No" vote, here is JPM's Malcom Barr with the bank's latest take on Greece which is that at this point, a Grexit is JPM's "base case"... and it only
goes downhill from there.
After the "big no", euro exit is our base case
  • After the “big no” it is now a race between two forces: political pressure for a deal, versus the impact of banking dysfunction within Greece.
  • Although the situation is fluid, at this point Greek exit from the euro appears more likely than not.
Early indications of the official result suggest the result is a “No” by a comfortable margin. What happens next?

First, it will be important to see the tone of the immediate political responses both within Greece and outside. We would expect the tone to be somewhat more conciliatory on both sides.

Hollande and Merkel are to meet tomorrow night to discuss the issue, and as we understand it, the Eurogroup is scheduled to meet on Tuesday. We expect that a split is likely to emerge in the coming days.  The Commission and France (and possibly others) will argue that negotiations should resume immediately with an aim of finding agreement.

Others will find it more difficult to return to negotiations with a newly emboldened Tsipras in short order.

In the German case, for example, the Bundestag has to be consulted before Mr Schauble can enter into discussions about a new program for Greece (as requested on 30th June).

However, the Bundestag has just broken for summer recess, so any such vote will require a recall. We have seen reports that talks at a technical level between Greece and the creditors may restart tomorrow (Monday), but we can imagine that the Bundestag will express its displeasure if it feels those discussions are in-progress without their express consent.

Second, there are reports of an emergency meeting between the ECB, Bank of Greece and Finance Ministry tonight, and at the latest the ECB will likely have to take a decision about ELA support tomorrow (if not tonight).

Our base case is that the ELA total will simply be rolled on a day-to-day basis for now. It is extremely difficult for the ECB to justify increasing the region's exposure to Greece at this point. That effectively means that the Greek banks are likely to run increasingly short of cash, and the acceptability of electronic forms of payments will diminish rapidly.

The Bank of Greece and Finance Ministry has a joint committee working to prioritize payments out of Greece for essential imports. There are reports, however, that suggest the logistical problems arising from these procedures are biting. Importers are facing delays in seeing their requests to make purchases processed.

And Greek exporters are finding it hard to get payment in euros from those they sell to, as their customers do not want to hold any euro balances within the Greek banking system. It is difficult to get a sense of the scale of these issues at this point. But our best guess is that these issues will multiply in the days ahead.

This suggests that what we see next will be a race between two forces: political pressure to move toward an agreement despite resistance from a number of northern European parliaments, versus the increasingly unpleasant implications of a dysfunctional banking system on the other.

This latter force is unpredictable: it may manifest itself in pressure on the government to stand down, or it may generate a more unified “siege mentality” within Greece.

The July 20th payment of €3.5bn to the ECB as Greek bonds mature creates one possibly fixed point as we look forward, but our sense is that could be dealt with via a number of mechanisms if political talks are progressing (transfer of SMP profits, short-term ESM loan, for example).

Our base case is that the pressures coming from a dysfunctional banking system in Greece will shorten the time horizon to negotiate a deal to a handful of weeks.

As that pressure builds, there is likely to be a temptation to call a referendum in Greece on euro membership, and for the state to begin issuing I-O-Us or similar and giving these some status as legal tender.

To the extent that pensioners and public sector employees find themselves being paid with such instruments, it takes the banks further away from solvency (they have liabilities in euros, but will have loans to individuals being paid or receiving “i-o-u” s which will be worth a lot less).

Meanwhile, we expect at least some countries in the rest of the region (not least Germany) will not hurry over the design of a new program, and will find it difficult to get parliamentary assent for any such program.

This is a path that suggests to us that there is now a high likelihood of Greek exit from the euro, and possibly under chaotic circumstances. Perhaps the rest of the region will agree to a reasonably quick deal, or the ECB will raise ELA enough to retain minimal viability in the payments system.

Perhaps the pressures of dysfunctional banks will force Mr Tsipras to stand down, and a deal is subsequently made. But for now, we would view a Greek exit from the euro as more likely than not.

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