The ECB increases pressure: Greece required to shut down its banks and to impose capital controls
The ECB froze ELA (emergency liquidity assistance – the last resort of liquidity available for Greek banks to fund deposit outflows) on Sunday (at the amount set Friday). This means that there is no fresh cash made available to Greek banks to accommodate deposit withdrawals and to cover other day-to-day operations. Hence it was decided by the Greek authorities to shut down its banking system for 7 days. Obviously, this will have a negative impact on the short as well as on the medium term for the economy and everybody’s life.
July 5: Referendum resulting in default or continued financial aid from official lenders?
In this referendum, Greeks will in essence be asked if they wish to make a deal with creditors and accept some structural reforms. In essence the EU asks Greece to make some efforts to balance-out its tax and social system, which are both, totally obsolete. We expect that the Greek population is accepting the deal, yet the unknown factor is whether the present government is to step down which would tremendously worsen the country’s political and economical system, i.e. definitely the country would go into default and rebuilding some kind of stability could take up to 3 decades (see examples of Argentina, Venezuela, Cuba, etc).
Membership Monetary Union: Not directly linked to a sovereign default
There are no legal means to expel a member from Monetary Union. Greece would need to take this step.
The ECB holds the key as could cut ELA or even ending it altogether. In the latter event, Greece would ultimately need to create its own currency which will take, physically at least 6 to 9 months. We continue to believe that the ECB would not take such a major political decision on its own. That euro-zone governments move in this direction is also very unlikely (this is confirmed by a number of statements made over the week-end). In theory, a government default is no reason in its own right to expel a country from Monetary Union. In fact (as there is no joint liability on euro-zone countries’ government debt), it would even be in the spirit of Monetary Union to keep the financial system of a defaulting sovereign afloat. For a number of reasons it is therefore, improbable for time being that an ECB-forced Greek exit from Monetary Union is in the making.
Financial markets: Heightened uncertainties – though fundamentally on track
With uncertainties since Friday evening much higher than a few days ago, risk assets (notably European equities, non-core euro-zone bonds) are bound to suffer. The euro is expected to weaken, mainly versus USD and the CHF. Central banks may intervene (the SNB in currency markets, the ECB in stabilizing non-core euro-zone bond markets – though possibly only in a later stage, in case market moves were deemed excessive). Yet and overall, we do not expect the fundamental economic picture to change as the whole Greek-process appears, this time round, to be well engineered on the EU-side.