Negotiations with Greece to impact capital markets for months to come

Agreement was reached surprisingly quickly at Friday’s meeting between Greece and its creditors, preventing the bankruptcy and departure of the country from the Eurozone. Greece gave in to its creditors’ demands in principle, and agreed that “the purpose of the program extension was a successful…review on the basis of the conditions in the current arrangement.” Nonetheless, the Greek government was given the opportunity to submit a list of reform measures to the institutions involved (formerly called the Troika) by today. Given the outcome of the meeting on Friday, this list should not deviate significantly from the conditions in the existing program. Otherwise, the crisis would heat up again if it were to do so.

The institutions involved will today evaluate whether the list is a “valid starting point” for the successful conclusion of the review of the program. In the event of a positive assessment, finance ministers will give the nod tomorrow for the extension of the program. This will, however, only be the starting point for further detailed negotiations regarding the program which should take a maximum of two months. Only after a successful completion of the review will Greece receive new financing from its creditors. It is somewhat unclear as to how Greek public finances will be financed over these coming two months. While the amount of the cash buffer is unknown, it is unlikely to last for two months, especially since redemptions to the IMF in the amount of EUR 2bn will become due. This pressure might result in the earlier completion of negotiations.

The extension of the current program is currently envisaged to be for four months. During this time, negotiations for the time thereafter should already start, i.e. a third support program. Greece’s net financing needs are relatively modest, but in July and August redemptions (excluding government bills) amounting to EUR 7.2bn are scheduled for refinancing. As it can almost be ruled out that Greece will have access to capital markets by then, the country is likely to have to turn to its existing creditors. So, the struggle between Greece and its creditors over financing terms can be expected to last for the next several months and to remain a topic on capital markets.

Assuming the Greek list and the program extension are approved, the ECB can be expected to increase the limit of its Emergency Liquidity Assistance this week, and this is likely to be necessary. Greek banks have relied on this facility since February 11, as the ECB stopped accepting Greek government bonds as collateral. Additionally, massive withdrawals of deposits have put pressure on the funding of Greek banks. As long as negotiations continue, we think that the ECB will provide liquidity to Greek banks through ELA to keep them afloat. We expect Greek government bonds to again become eligible as collateral with the ECB only once the review is concluded, at the earliest.