Just five days ago, Greece’s Prime Minister Alexis Tsipras and former Finance Minister Yanis Varoufakis were supported by a chorus of cheers radiating out of Syntagma Square, following their convincing victory opposing additional EU bailout measures – young Greek voters were dancing in the street as history was made for the indebted nation.
Fast forward to Thursday and the mood has turned unequivocally sour with the stark reality setting in that Greece now faces a viable path out of the Eurozone, an unthinkable revelation just days before. Amidst a rapidly hardening stance from Eurozone leaders, Greece has, what is widely believed, just days left to find a solution and propose credible reforms to avert a ‘Grexit’.
Unfortunately for Mr. Tsipras, such reforms would likely entail the endorsement of the very measures he recently sought to garner opposition against, casting a palpable ray of doubt as to whether an impasse can be effectively bridged ahead of Sunday’s ‘final’ deadline. With the Eurogroup’s ultimatum now delivered, only an outright Greek capitulation and breach of its ‘red lines’ will allow for the inking of a deal, something that has eluded both sides for the past five months.
Crisis on the Home Front
Sunday’s euphoric referendum result in Greece has quickly calmed down after the Greek central bank announced the continuation of its bank holiday into next week, along with the reiteration of the country’s capital controls – both of which having been pledged to be removed immediately following the referendum.
Moreover, the European Central Bank’s (ECB) recent ‘haircut’ and drip fed Emergency Liquidity Assistance (ELA) lifeline has threatened to sap Greece of its remaining finances in a matter of days – ATMs have rapidly exhausted their supply of euro notes, with denominations of 20 and larger now largely gone.
Earlier this week, Mr. Tsipras issued a plea to the ECB and EU to acknowledge the humanitarian side of the crisis presently unfolding in Greece – the request was quickly met with disappointment, culminating in no additional ECB assistance after its surprise referendum vote.
The news in Greece worsened Thursday, after a report surfaced that several Greek banks were facing shut down and upheaval, regardless of any secured bailout. With the economy in shambles or outright stasis, as well as the political havoc metastasized by a lingering state of uncertainty, the banking structure in Greece is almost certainly poised for a reorganization, regardless of any finality or resolution in negotiations.
This week’s negotiations were widely seen as a last-ditch effort to secure an accord between Eurogroup lenders and the Greek government. Monday’s brief window of optimism was immediately tempered after Greek Finance Minister Euclid Tsakalotos arrived in Brussels empty-handed and absent of any new proposals, for which the summit originally was called for.
Subsequently, an exasperated group of European finance ministers underscored their frustration, which also gave way to an electric speech yesterday by former Belgian Prime Minister and acting European Parliament member, Guy Verhofstadt.
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However, yesterday saw a definitively hardened stance and waning optimism from German Chancellor Angela Merkel, long since an advocate of holding the Eurozone together at all costs. This mood was also corroborated yesterday by ECB President Mario Draghi, who cautioned the likelihood of a deal being reached between the Eurogroup and Greece, stating, “This time it’s really difficult,” according to a recently made statement in Rome.
Mr. Tsipras managed a convincing referendum victory last week amidst several pledges from the government and overwhelming support from the country’s youth (age 18-24), who voted against austerity measures by a factor of two to one. Indeed, many of the Greek’s youth population, hardest hit by austerity measures and unemployment peaking at a 50% threshold, operated under the belief that the situation could not get any worse.
Despite assurances calling for the abolishment of capital controls and the reopening of banks immediately following the referendum, the Greek population has continued languishing on €60 daily withdrawals and bank closures. Worse yet, the Eurozone’s hardened stance has swung open a door few Greeks wanted to walk through, i.e. passage out of the Eurozone, an outcome 80% of population is vehemently opposed to. Subsequently, any move towards this finality could likely foster widespread resentment domestically, namely as Mr. Tsipras specifically ruled out this scenario previously.
— Alexis Tsipras (@tsipras_eu) July 1, 2015
Base Case – Grexit
A number of analysts and investment funds have now portended a Grexit as their base case scenario, a stance that has not managed to roil currency markets thus far, which may suggest any shock has since dissipated or mitigated after months of failed negotiations.
Unfortunately, the situation will now largely continue in wait-and-see mode until early next week, pending any submittal of proposals by Mr. Tsipras and Mr. Tsakalotos. Interestingly, Greece dispatched a letter to the European Stability Mechanism (ESM) yesterday, requesting a three-year bailout loan, conditional upon reforms in tax and pension-related measures – details were not provided however.
The mood was less muted in bond markets however, with a 2-year Greek yield spiking to 57.55% Thursday, still well off its 2012-highs of 349.15%. At the time of writing, the EUR/USD is trading at 1.1033, down 0.33% during European trading.