Although the probability of a collapse of the negotiations is not negligible, we believe that Greece and its creditors should be able to bridge their differences during this weekend’s Eurogroup meeting.
However, this is unlikely to represent the end of the Greek drama. If an agreement is reached, we believe it is likely to be an extension of the current bailout, providing Greece enough funds to avoid a default on its official creditors conditional to meeting certain targets. Uncertainty regarding the Greek government’s ability to implement reforms, meet fiscal targets and negotiate a third bailout will remain high. Meanwhile, SYRIZA may also have to pay a big political price for making significant concessions to the creditors. As a result, the government may decide to call new elections over the coming months.
Even if the deal is approved and implemented, we believe that the creditors’ proposals, which are likely to be the base of any agreement, will have a recessionary impact on the economy. As a result, Greece’s ability to meet any fiscal target agreed with the creditors will be extremely compromised.
Even if we believe a deal to be the most likely scenario, it is impossible to ignore the possibility of Greece entering a default on 1 July. This will certainly have a negative impact on the Greek economy, although how negative will greatly depend on whether the European Central Bank (ECB) will continue to fund the banking section or not. Pressure on the ECB to withdraw Emergency Liquidity Assistance (ELA) will be intense if Greece defaults, although we also believe the central bank will take into account the impact of its decision on the Greek economy. However, the situation can become unsustainable if Greece defaults on a EUR3.5 billion bond held by the ECB on 20 July. Under that scenario, we believe it would be impossible for the ECB to continue providing ELA to Greek banks. This would have grave consequences to the economy and could precipitate Greece’s exit from the Eurozone.