3 Possible Outcomes For Greece

Peter’s Commentary:

Three possible outcomes for the Greek situation…

Temple of Athena

Temple of Athena
Photo by Dennis Jarvis

From ZeroHedge, Tyler Durden, and Bloomberg, Vassilis Karamanis, February 17, 2015:

When it comes to trading the possibility of a Grexit, Bloomberg strategist Vassilis Karamanis writes,that there are three possible outcomes.

Scenario 1: Greece exits the euro
  • Probability of Grexit is now increased to 50% from 25%, Commerzbank economists including Christoph Weil write in client note
  • EUR/USD will probably fall sharply to 1.07 area, with ample room to test parity in 2015, three traders in London say
  • EUR will drop 5% vs USD in a matter of few weeks, a buy-side trader in Southern Europe says
  • September 2003 low of 1.0765 and March 2003 low at 1.0504 are levels to watch for before 1.0073, 76.4% fibo of Oct. 2000/July 2008 rise
Scenario 2: Capital controls are imposed on Greek banks
  • Should ECB turn off ELA liquidity, capital controls might be needed, Barclays’ economists including Antonio Garcia Pascual write in client note
  • EUR/USD may test recent 1.1098 low and fall to 1.10 psychological lvl, where heavy demand is purported, the traders note
  • 1.10 sees significant option barrier protection, two of the traders say
Scenario 3: Agreement is reached within the next few days
  • Bailout deal remains base-case scenario, Goldman Sachs analysts write in client note
  • Should a compromise be reached by Friday, EUR may test 1.1600/50 area on back of relief rally, all four traders agree
  • Monetary policy divergence would resume as main theme once again, two of them say
  • EUR/USD was bottoming around 1.1541/46 on Jan.19-21, before ECB announced QE program on Jan. 22

Of course, since it is now Draghi’s determination to keep injecting as much paper money into the system as is necessary to keep pushing asset prices to all time highs, any rebound in the EUR will be short-lived.

Furthermore, Commerzbank AG on Monday raised the probability it assigns to a Greek euro exit to 50 percent from 25 percent after euro-area finance ministers’ talks in Brussels broke down. Bank of America Merrill Lynch strategists, including Athanasios Vamvakidis, wrote in a client note Feb. 10 that the Greek government “can potentially get through the IMF payments in March, but would have difficulties after May.”

Worst Case Scenario

And in case that wasn’t enough, here is Bloomberg laying out how a worst-case scenario could unfold.

 The Greek government, companies and lenders have all effectively lost access to international markets, due to the uncertainty over the country’s future. The current sources of liquidity are bailout funds from the euro-area nations, the currency bloc’s crisis fund, the International Monetary Fund and the European Central Bank’s Emergency Liquidity Assistance.

Failure to strike a compromise means that these payments would cease. This means that the state would be unable to service its debt obligations, which stand at 22 billion euros ($25 billion) this year, excluding treasury bills, according to the 2015 budget. Greek aid talks in Brussels ended abruptly Monday.

If the ECB considers the talks to have stalled, there is a risk that it will suspend ELA, perhaps leaving Greece with no choice but to exit the euro zone,” Jennifer McKeown, senior economist at Capital Economics Ltd. in London said by e-mail.

Lack of access to bailout funds would also mean that the Greek state wouldn’t be able to repay its 15 billion euros outstanding of short-term debt held by the country’s lenders. At present, Greek banks continuously roll over bills, helping the government stay afloat. The ECB decision not to accept Greek bills as collateral for financing operations and accelerating deposit outflows are limiting the ability of banks to buy new bills.

Return Of The Drachma

All of which would finally lead to what everyone has known for years is inevitable: the return of the Drachma.

With no access to any source of financing, the insolvent state and its banks would have to start using a new currency, or a currency equivalent, as no economy can survive without cash. This would be the start of a de-facto exit from the euro area, caused by Greece’s inability to deal with a stripping of liquidity worth as much as 96 billion euros, according to Bloomberg calculations below. <More>

 Conclusions

So, three alternatives, with the highest chance going to No 1, Greece exiting the Euro.

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