Greek deal by Sunday?

The Greek saga feels like it really is coming to a head now. Last night a full EU28 leaders summit was called for Sunday, which will follow a Eurogroup meeting to take place on Saturday. Greece has formally been given a “last chance” to present a detailed application for a third bailout by Thursday night, along with conditions it is prepared to accept. The difference this time is that should the Greek proposals not be acceptable then the Eurogroup will be discussing a Grexit. Jean Claude Juncker confirmed last night that they already have a “Grexit scenario planned in detail”. In addition, Donald Tusk, President of the European Council, confirmed that an “inability to find agreement may lead to the bankruptcy of Greece and insolvency of its banking system”.

The latter would likely occur from the full withdrawal of ELA from the ECB which would put the entire Greek banking system into resolution. From here there would be no turning back.

So what is new here? It is not the deadline, we have had so many of those and it is becoming quite tiresome to say the least. What is new is the fact that, for the first time, the creditor group are facing up to the prospect of a Grexit and already have a plan in place, including humanitarian aid to support that exit. Part of Tsipras’s negotiating plan seems to have been his confidence that the creditors wanted Greece inside the Eurozone at any cost. That is clearly off the table now, although all the talk from the leaders is that they will do everything they can to keep them in. The creditor group will want to see detailed plans of fiscal measures, as well as reforms at least as good as those presented by them to Greece before Syriza walked out of negotiations.

On the flipside, Tsipras will feel emboldened by his strong vote of confidence from the Greek electorate at the weekend. How can they now forge an agreement? Perhaps with the knowledge that a Grexit is genuinely on the table and knowing that the Greeks definitely did not vote for this? It promises to be an interesting few days.

Should an agreement be reached, there are still the technical details and procedures for actually implementing the dispersions of cash, so it is likely that a form of bridge financing will be put in place and ELA will be increased to facilitate the reopening of the banking system.

If no agreement is reached, then the ECB has already stated that it will use all tools it has to protect the Euro and maintain price stability. It has also mentioned “new tools”, which is an interesting phrase and has provoked debate across the desk here.

Which way will it go? Our view has always been that there would be some sort of a fudge, however that view is being tested here right now and it is probably too close to call with any conviction. Markets are already presenting what we think is a buying opportunity, but it is important to keep some firepower available for what might be an even better entry point in the aftermath of this weekend.