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Greece: The big picture update, and why Deutsche Bank thinks Europe will fold

February 5, 2015

Noted:
* Greece Refuses To Back Down: “Government Will Do As Promised” Tsipras Says 

Source here.

The Greek situation summaries Greece by Deutsche Bank’s George Saravelos have consistently been among the best in the entire sellside. His latest Greek update, which is a must read for anyone who hasn’t been following the fluid developments out of southeast Europe, which fluctuate not on an hourly but on a minute basis, does not disappoint.

But while his summary of events is great, what is of far greater significance is his conclusion, namely that ultimately Europe will fold: “we consider the most likely outcome to be a Eurogroup offer of a new Third program” and “given that the current program expires this February the offer to negotiate a new Third program may provide political room for the government to sit on the negotiating table. At the same time such an offer is very likely to be attached to strict conditions, with the willingness to accommodate t-bill issuance an open question. Developments overnight suggest that this has become less likely, imposing maximum pressure on the government to reach agreement within a matter of weeks.”

If DB is right, and if Europe folds, the question then is what concessions will the ECB and the Eurozone be prepared to give to Italy, Spain and all the other nations where anti-European sentiment has been on a tear in recent months, and especially in the aftermath of Syriza’s stunning victory.

From Deutsche Bank

Greek Update

Over the last couple of weeks we have framed developments in Greece around three questions:

First, under what conditions would the Troika be willing to continue negotiating with Greece?

Second, does the Greek government accept these conditions?

Third, how does the ECB link Greek bank financing to program negotiation?

Yesterday evening we got an answer to the last question sooner than expected. The ECB no longer considers Greece to be under a program, and the rating waivers on Greek government-based collateral are being removed. We estimate that Greek bank funding at the ECB financing windows currently runs between 70-80bn EUR, of which approximately 30bn relies on AAA EFSF-based collateral. As a result the remaining funding (or about 50bn) will now have to shift to ELA from next week. Even if this decision is likely to have materialized when the program expired at the end of February, there are two broader implications.

First, the decision shows that the ECB is feeling increasingly uncomfortable providing financing to Greek banks while negotiations are under way. This in turn raises the more important question of how long and how large any ELA provision is going to last. ELA usage is subject to a cap that is under bi-weekly review and requires a 2/3 majority of Governing Council votes to be blocked. The government said that the cap was raised by 10bn this week to be reviewed after developments in the European Council and Eurogroup meetings in the next two weeks.

Second, the ECB decision shows that the ECB is very unlikely to accommodate increased t-bill issuance from the Greek government. There are currently two caps on t-bill usage. The first applies to total issuance and is currently set by the Troika at 15bn. The second applies to the t-bills that can be directly submitted to the ECB windows by Greek banks and currently stands at 3.5bn. The ECB kept this unchanged in yesterday’s meeting. The 11.5bn of t-bills not submitted to the ECB are currently financed by other types of collateral.

Big picture, the above two developments are likely to further accelerate timelines and pressure on Greece. The government’s strategy has been to secure a window between March (when the current program expires) and July (when a large GGB ECB redemption is due) over which to negotiate a new program. Time for this negotiating window would have been bought by both Troika and ECB willingness to accommodate increased t-bill issuance to pay for ongoing cash needs over the course of Q2. We have yet to hear from the Eurogroup on its willingness to raise the overall t-bill cap, but even if this materializes today’s ECB decision signals rising discomfort for the central bank to accommodate this, even indirectly via other types of collateral.

This then leaves the remaining two questions above that need to be answered over the next two weeks: the conditions under which the Troika/Eurogroup would be willing to negotiate with the Greek side and the Greek government’s response. The most confrontational outcome would be a Troika requirement that the current program review is completed, requiring a request from the Greek government to extend it before February 28th. A more conciliatory outcome would be an offer for negotiations on a new third program,** but accompanied by a pre-commitment (most probably written) by the Greek government to respect certain conditions. Irrespectively, the t-bill decision will be key: assuming the Troika and ECB are unwilling to approve higher issuance, the negotiations would have to be completed by the earliest of any potential ELA cap being hit due to deposit outflows or the Greek government running out of cash to pay ongoing budget needs. The exact timing of the latter remains unclear, but with Greek budget execution under very significant pressure due to the change in government and weakening economy this is unlikely to last beyond April.

The situation remains very fluid but as things stand we consider the most likely outcome to be a Eurogroup offer of a new Third program. Greece in any case has lost market access making ECCL eligibility unlikely, and given that the current program expires this February the offer to negotiate a new Third program may provide political room for the government to sit on the negotiating table. At the same time such an offer is very likely to be attached to strict conditions, with the willingness to accommodate t-bill issuance an open question. Developments overnight suggest that this has become less likely, imposing maximum pressure on the government to reach agreement within a matter of weeks.

* * *

Thursday February 5th – Eurogroup working group (EWG, the institution responsible for preparing Eurogroup meetings)

Thursday February 5th — Greek parliament opens, elects new speaker of the House

Saturday February 7-9th — Government presents legislative agenda to parliament, vote of confidence midnight Monday 9th

Wednesday February 11th – Likely t-bill auction to cover EUR 1.4bn maturity on 13th

Wednesday February 11th – potential emergency Eurogroup

Thursday February 12th – European Council of EU Leaders, Tsipras likely to meet Merkel on sidelines

Friday February 13th – Voting for new Greek President begins, EC Commissioner Avramopoulos most likely candidate, originating from New Democracy. Likely completed by second round on the following day requiring 151 MP majority

Monday February 16th – Eurogroup where Greece likely to be top of agenda, conditions for extension of program to be made explicit by now

Wednesday February 18th-19th- – Bi-weekly ELA review Saturday

February 28th – Current EFSF program expires

3 Comments
  1. flyer168 permalink

    “Greece: The Big Picture Update, And Why Deutsche Bank Thinks Europe Will Fold”

    Ewoon,

    Just to share this…

    “…That didn’t take long: just hours after Greece entered the ECB countdown mode, with now just 23 days until midnight on February 28, when the ECB is set to yank the final pillar of liquidity support, the ELA – as it has warned before – it is time to start contemplating Plan B, or rather plan Z. A plan, which as described by Nordea’s analyst Jan von Gerich, would be quite unpleasant for that nearly extinct class of Greeks, bank depositors, because the “plan”, or rather blueprint, is a well-known one: capital controls.

    As Nordea points out, ECB’s decision to restrict Greek bank access to direct liquidity lines risks increasing uncertainty among depositors. As a result depositors may decide to withdraw more money from Greek banks. Most of these outflows would likely be replaced by ELA funding, increasing risks for Eurosystem.

    However, if ECB becomes more uncomfortable with situation or Greek banks risk running out of collateral, Greece may need to impose Cyprus-style withdrawal limitations and capital controls…

    Why is this important? Because as we have said from day one, what is going on now between Greece and Europe is a game of leverage, leverage which can now be quantified: For the ECB, it is measured by how long the lines are in front of Greek ATMs; for Greece, it is inversely proportional to the level of the Stoxx 50 (and to an extent the S&P500).

    And just in case some think that capital controls is a fringe plan, one that will never see broad acceptance, here are the key highlights from Bloomberg’s “One Way Greece Can Keep Its Banks Alive.”..

    What Europe Plan B, or rather Plan Z, would look like:

    “If the deposit flight is continuing while things drag on, the euro zone wouldn’t want to increase its exposure to Greece through rising ECB financing,” said Ruparel. “Then they’d push for capital controls as a way of limiting further exposure in case things don’t work out and Greece ends up exiting. It’s an option nobody wants, but it will become likelier the longer the type of brinkmanship we’ve seen recently continues.”

    Even though they’ve been loosened, capital controls remain in place in Cyprus. While they have been successful at stemming deposit outflows and stabilizing the banking system, the country is stuck in a three-year-long recession.

    In the case of Greece, controls probably would only work for a few months as Tsipras’s government negotiates a new debt deal with its European creditors, according to Benn Steil, director of international economics at the Council on Foreign Relations in New York. Without an agreement, restrictions on withdrawals wouldn’t be enough to keep Greece in the euro zone.

    “The Grexit could happen slowly, not in a big bang as we always imagine,” Steil said. “It could come after capital controls and other ways of scrambling to continue.”

    The sad conclusion, if only for innocent Greek bystanders in this epic middle-class plunder designed to make trillionaires out of billionaires:

    “The experience of Cyprus suggests that you cannot completely rule out capital controls any more as a policy option,” said Jens Bastian, a former member of the European Commission’s Greek task force who’s now an independent analyst based in Athens. “The situation isn’t so dire yet, but it could get there.”

    Capital controls would be painful and unpopular with the Greek public, putting even more pressure on Tsipras to reach an agreement sooner rather than later, according to Gros of the Centre for European Policy Studies.

    “The popularity of the government will plummet, and the economy would be hurt too,” Gros said.

    Of course, the ECB knows very well that should a bank run commence then the days of the Tsipras government – capital controls or not – are numbered. Which is preicsely why yesterday it tried to precipitate one. And since, as we noted earlier, the only marker of Greek leverage is the response of the global capital markets, today’s pre-determined market ramp, which started with the SNB’s intervention in the EUR and has since transformed into a wholesale central bank binge fest across all assets (except gold of course), the corresponding reaction in risk is precisely meant to smash any trace of leverage the new Greek finmin may have hoped he had.”

    http://www.zerohedge.com/news/2015-02-05/whispers-greek-capital-controls-begin

    “In what is being described as “the first Greek pro-government rally”, thousands of people have gathered outside Greek Parliament in the infamous Syntagma Square to protest against a decision by the European Central Bank to restrict the eligibility of Greek bonds used as collateral from Feb. 11, rather than at the end of February.

    “ECB Chief Draghi chose to play Merkel’s game again and to blackmail the Greek people and the new Greek government,” is one of the charges being aired on the pro-SYRIZA quarters of cyberspace…”

    Thousands Of Anti-ECB Protesters Gather In Athens In “First Greek Pro-Government Rally” – Live Feed – http://www.zerohedge.com/news/2015-02-05/thousands-anti-ecb-protesters-gather-athens-first-greek-pro-government-rally-live-fe

    You be the judge.

    Shalom.

  2. flyer168 permalink

    Also to share this…

    Where The Greeks Are Hiding Their Cash – http://www.zerohedge.com/news/2015-02-05/where-greeks-are-hiding-their-cash

    Submitted by Tyler Durden on 02/05/2015 15:07 -0500

    While today surprised some with its lack of images of Greeks standing in line furiously pulling cash from bank ATMs, as Bloomberg reports, Greeks are anxiously stashing cash in the most unusual places…

    As Bloomberg reports, in the days after Tsipras’s election, the nation’s banks found themselves busy again…

    The teller at National Bank of Greece SA leaned forward to tell one customer something he’s noticed over the past few days.

    “Had you come in last week, without warning, I wouldn’t have been able to give you so much cash,” he said in a low voice to the client withdrawing 20,000 euros. “We didn’t have the money.”

    And stashing it wherever they can – that’s not under the eye of the government…

    He said customers coming in to withdraw funds ahead of the election were for the most part older Greeks worried about their savings, removing cash and stashing it in safe deposit boxes.

    Another favorite for an older generation of Greeks is to buy gold sovereigns from the central bank.

    On Greek said that he’d withdrawn 25,000 euros from the bank, taken it home, worked loose a tile in the bathroom and stashed the money there.

    Another took the cash to his village and buried it in the garden.

    Yet another fashioned a small safe box in the air-conditioning unit on his balcony.

    “I can’t fault these people,” said Karavelas, 37. “They were obviously people who had worked hard for their money, with families and jobs, not oligarchs.”

    And deposit runs continue…

    The deposit outflows in the walk up to the elections would rival banks’ losses in 2012 when back-to-back elections in May and June fanned fears Greece would leave the euro.

    “The story of the Greek deposits is not one of a bank run but a bank marathon,” said Andreas Koutras, a partner at In Touch Capital Markets Ltd. in London. “The smart money is long gone and there are few accounts with more than 100,000. The true barometer of fear is the amount of hard cash that is withdrawn, not how much is transferred outside Greece. This has gone up the past two months.”

    And finally, if you are wondering why Greek Bank runs have not been greater so far…

    Karavelas, the taxi driver, said he commiserates with his clients even though he has little to worry about. “I don’t have deposits,” said the father of two who still has his savings in the bank. “I have about 1,000, 2,000 euros in the bank and that’s for my children.”

  3. flyer168 permalink

    “Greece: The Big Picture Update, And Why Deutsche Bank Thinks Europe Will Fold”

    Ewoon,

    Things are really getting hot in Europe…

    February 04, 2015

    “… Today Dr. Paul Craig Roberts stunned King World News when he said that the new Greek government may be assassinated because the stakes are so high. The former U.S. Treasury official takes KWN readers on a terrifying trip down the rabbit hole of government lies and assassinations, where the stakes are high and governments play for keeps.

    Dr. Paul Craig Roberts: “There is much more involved here with Greece than just the interests of the creditor banks, who still want to be paid 100 cents on the dollar. There is another strong interest and this is the interest of the centralizing European Union government and the interest of the European Central Bank as the policy-maker for all of the countries.

    So they are using the Greek crisis to establish that ruling power structure….

    “That makes it difficult to make an agreement with the new Greek government to ameliorate the conditions imposed on Greece. So it makes the EU inflexible. That inflexibility gives Greece the cards to say, ‘We’re not playing your game — we’re going to play a different game and accept Russia’s offer.’

    New Greek Government May Be Assassinated

    We’ll see whether the Greek government does that. Now of course they may not be allowed to. They may be assassinated. It’s entirely possible. I’ve never thought that the United States would allow a new government in any of its vassal states to rise up and become independent of Washington’s control.

    Or Perhaps Have An ‘Accident’

    So the new Greek government officials may have an ‘accident.’ All kinds of terrible things can happen to people, and have, that get out of sync with Washington. We’ve had several cases in Latin and South America of leaders who wouldn’t follow Washington’s line having mysterious deaths. There have been a number of them who have been overthrown in CIA organized coups.

    KWN Roberts VII

    When President Obama came into office, the democratically-elected government in Honduras was overthrown by the military. Of course the Honduran military has been in Washington’s pocket forever. So all these kinds of things can happen to the new Greek government and they may be aware of that.”

    Planes Crash, Government’s Get Overthrown

    Eric King: “So Merkel or somebody may have already explained to the new Greek government: ‘If you go down the rabbit hole of dealing with Russia and China, that may be the end of you.’”

    Dr. Roberts: “Yes. Somebody may have already said to them that ‘aligning with Russia and China isn’t a very good idea. Planes crash. Governments get overthrown.’ That’s a way of telling them ‘We’ll get you.’ This is not a prediction, this is a possibility.

    The Brothers

    And these things happen. Read the book that came out recently titled The Brothers. The book is about Allen Dulles, who was the head of the CIA, and his brother John Foster Dulles, who was the Secretary of State. They just overthrew country after country, from Iran, through Africa and South America to Indonesia. If you read the book you can see how it works.

    Any time some American interest was deemed to be threatened by some government somewhere, they went in there and overthrew it — that’s the American way. Look at what happened to the Ukrainian government. This was an organized coup and the other day President Obama more or less admitted it.

    “The Brothers” shows on a country by country basis how they operated and how they overthrew the governments.

    Confessions Of An Economic Hit Man

    Another good book to read is Perkin’s book Confessions of an Economic Hit Man. Perkin’s was one of them who would do this type of thing. American interests would set their sights on the resources of some country and then they would send in Perkin’s to make some big development plan. He would then convince the country that this development plan was going to make the country so rich that it didn’t matter how much money they borrowed to implement the plan because it would be easy to pay it back.

    It Was All A Lie

    Of course it was all a lie. It was designed to get the countries heavily in debt, and the development plan would not succeed well enough to repay the debt. Then the banks would come in and dispossess the country of their resources. That would be the solution to the indebtedness — ‘Turn over your oil, your timber, your other natural resources, etc.

    So the book Confessions of an Economic Hit Man shows how these countries are subverted and looted, and the book The Brothers shows how the CIA and the State Department went about overthrowing governments.

    Operation Gladio

    Well, these people in Greece probably know about these things. Certainly they know about Operation Gladio because this was revealed by the President of Italy in 1990. This is not a conspiracy theory. It was, of course, a conspiracy of secret services against the people. This is something that the President of Italy told the Italian Parliament and the whole world.

    The Italian President made clear that the bombings that occurred in Europe after the Second World War up to 1990, these were bombings that were blamed on Communists. But these were bombings carried out by Italian Intelligence and the CIA. They would explicitly target women and children and blow them up with bombs so they could influence elections. This false flag terrorist operation was called Operation Gladio.

    The Bologna Train Station was one place where the bombs were set off. The bombs killed 85 people and wounded hundreds of others. This was blamed on Communist terrorists but it was done by Italian Intelligence in collaboration with the CIA and other European Intelligence Services, including the British. The Greeks have to know this and they also have to be aware that this can happen to them.

    KWN Leeb IV 2:3:2015

    The Stakes Are High

    So when Putin and Russia offered help for the Greek’s financial situation, they handed the Greeks a card that can’t be trumped.

    The question is: Do the Greeks dare to play that card? The stakes are high and it’s extremely dangerous to go against Washington for all the reasons I just told you.”

    http://kingworldnews.com/paul-craig-roberts-new-greek-government-may-assassinated/

    ***ALSO JUST RELEASED: Superpowers Battle Over Greece As Europe Trembles With Fear Of World War III CLICK HERE.

    You be the judge.

    Shalom.

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