They voted ‘no’. Now what?
Euro-area leaders wanted Greece to vote “Yes”. The Syriza-led government backed “No” - and they won with 61% of the vote. The following scenarios are based on
Greece won’t leave the euro overnight. But it may face face three or four weeks of increasing pressure to start printing its own money.
That’s because Greek banks might soon be unable to meet European Central Bank demands for the collateral needed to keep access to Emergency Liquidity Assistance, and the Greek government would run out of cash to pay its bills and workers. At that point, it would be Greece’s decision to back out of the currency bloc.
Not necessarily. The ECB probably won’t withdraw its support until after the euro area’s political leaders have made up their minds. That process won’t end before Tuesday’s euro-area leaders’ summit, and might drag on for weeks.
Instead, the institution’s bank supervision arm will decide how to value the government-backed assets held on Greek banks’ balance sheets. Meanwhile, the central bank’s monetary policy arm will consider whether to object to collateral that lenders post to gain ELA access from the Bank of Greece. Then, the banks would get calls for new collateral and might come up short. Taken together, the supervisory and ELA review could show the Greek banks to be insolvent, and Greece wouldn’t have the means to use euros to prop them up again.
The ECB’s Governing Council has declared it will work closely with the Bank of Greece to maintain financial stability.
Greece also faces a series of financing hurdles, including bill refinancings and loan repayments. Things could come to a head on July 20 — if they haven’t already — when Greece needs to repay about 3.5 bln euros in bond redemptions for securities held by the ECB.
At some point, a default could force a decision on Greece’s euro access. For example, if the government defaults to the ECB on July 20, that could trigger margin calls on the banking system and lead to a more generalised default. The banking system could also face some other credit event.
This would put pressure on the currency bloc as a whole and the Bank of Greece in particular — a process that would be neither quick nor painless, since the ECB would have to parcel out losses and might need to spend years unwinding collateral holdings.
The euro area could decide to help Greece to an “orderly exit,” through a phased withdrawal of liquidity or some other settlement mechanism. It could also put Greece’s euro membership on temporary suspension, a prospect raised over the weekend by German Finance Minister Wolfgang Schaeuble.
As part of its efforts to protect the currency bloc, the ECB stands ready to assist other nations in the region to ward off contagion from Greece.
One option might be to convert the emergency aid into a swap line, a tool that central banks use to extend liquidity to their counterparts.
Already, the ECB is preparing a facility with its Bulgarian counterpart, as a way to offer euros to the Bulgarian banking system against eligible collateral. Neither central bank would comment on the project.
Swap lines are a standard part of the global central bank toolkit. Since 2013, the ECB has had standing liquidity backstops with the Federal Reserve, the Bank of Japan, the Bank of England, the Bank of Canada and the Swiss National Bank. Permanent swap lines were set up after temporary arrangements were integral to surviving 2012 financial shocks.
If Greece introduces its own currency, the legal procedures would need to play catchup.
Any contracts signed in euros will be thrown into question. Some sort of legal procedure will need to be found to get Greece out of the euro, or at least to suspend its membership.
As one way around the hurdle, euro-area finance ministers are considering whether Article 352 of the European Union’s founding treaties might offer some basis. That section, which provides for the extraordinary adoption of measures, can only be used by unanimity and working with the European Commission and European Parliament.
Any new currency would probably start off by posting a hefty discount to the euro. Analysts have said Greece’s citizens would see an initial 30% to 40% drop in their purchasing power should the nation replace the euro.
After introduction, its value could sink lower as prices rise at the same time and inflation picks up. If Greece is lucky, the new currency would reach an equilibrium after a few months, perhaps buoyed by savings, foreign-held euros and tourism spending.
It’s also possible the Greek economy could go into freefall. At that point, the government might need another international bailout anyway, when things could look far worse. (Source: Bloomberg)