They voted ‘no’. Now what?

Financial Mirror (Cyprus) - - FRONT PAGE -

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)

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