26 June 2015 — What happens next week if no deal is reached?
While negotiations are dragging on, people keep asking what will the day after look like? What happens if no deal is reached on Saturday and we wake up on Monday with the stalemate continuing?
On the assumption that no deal is reached, Greece will default on its IMF payment on Tuesday. This is a $1.7 Billion payment that Greece cannot make. In fact there have been reports today that the government even has trouble making wage and pension payments due on Monday. A temporary (?) shortfall has been plugged by retaining the funds of EYDAP, the Athens water company (see here).
Missing the payment will be treated as arrears by the IMF straight away as Lagarde has made it clear that Greece will not be given a 30 day grace period before a missed payment being registered as a default event (for the IMF). The reason for this is probably that Greece has already made the May payment by using the SDRs and then bundled the start of June payments together (to be paid Tuesday).
Missing the IMF payment will not bring the world down, as it will not be considered a default event by credit rating agencies. The agencies have clarified that a default on public liabilities does not have the same effect as failing to pay private creditors (it is not a credit event). It is expected therefore that European authorities will not consider a missed IMF payment a default event that triggers acceleration clauses in EFSF/ESM/ECB loans.
The problem on Tuesday will come from the ECB. ELA assistance (which is keeping the Greek banking system in life support) is dependant on Greece being “in-programme”. The current bailout ends on Monday. How will the ECB continue ELA on Wednesday morning if Greece is not under a support programme? The Greek banking sector is tethering on insolvency even with the current support in place. A defaulting sovereign will blow a large hole in the banks’ balance sheets, pushing them into insolvency. The ECB will have trouble continuing ELA for an insolvent banking sector in a defaulting state with no official support structure.
If no agreement is reached, crunch day will be Wednesday, 1st of July. Let us hope it is not Ash-Wednesday: a day for penitence.