The Greek crisis has now reached the deposit flight stage. By Monday, the Tsipras government will have to decide whether to accept the proposal presented by creditors or whether to impose restrictions on capital movements….
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– The FOMC meeting was entirely interlocutory. As expected, participants’ views on rates have shifted downwards somewhat.
– The ECB has called an emergency Governing Council meeting this afternoon, on the Bank of Greece’s request. The meeting will discuss the liquidity emergency in Greece. Yesterday, several press sources reported an acceleration in the drop in bank deposits, from 400-450 million at the beginning of the week to 850 million on Wednesday, therefore adding up to almost one billion euros in Thursday along. This is the first signal that the Greek population has acknowledged the imminent risk of the Greek financial system grinding to a state of paralysis. Another signal was the first demonstration held in front of the Greek Parliament in favour of an agreement with creditors, that would keep the country within the monetary union. Yesterday evening, press agencies quoted European sources in reporting that ECB board member Coeuré had warned the Eurogroup he was not sure if Greek banks would be able to open for business on Monday morning; naturally, the ECB did not confirm these rumours, but it is now obvious that the situation is rapidly coming to a dramatic head. Would can the ECB do? Apparently, it will be discuss an urgent request for a further extension of ELA (worth 3.5 billion euros, according to rumours) to guarantee the functioning of the banking system for a few more days, at least until Tuesday, 23 June, hoping that in the meantime Greece accepts the creditors’ offer.
The financial Eurogroup of 18 June spent only an hour and a half discussing Greece, and to no avail. The IMF, the European Commission and the Eurogroup all stepped up pressure on Finance Minister Varoufakis. The IMF has warned that no grace period will be conceded to Greece, “neither two months, nor one month”, and that will be considered “in arrears” starting on 1st July. Even if this would not cause the rating agencies to officially declare Greece’s default, and would not be enough to activate CDSs, from that date the EFSF could request early repayment of its credits – although this highly unlikely. From his parallel universe, Varoufakis has presented the umpteenth document rife with good intentions, essentially asking creditors to accept the plan presented by his government, including the SMP bond swap, financed with ESM funds. A move which, once again, ignores the very clear position creditors have taken months ago, and which seems to have caused further exasperation. Given the rapid evolution of the Greek domestic situation, the Eurogroup hopes that during the weekend the Tsipras government will resign itself to accepting the plan presented on 3 June to avoid a catastrophe. To this avail, an extraordinary Eurogroup meeting has been called on Monday 22 June, but this time at head-of-state level.
Between today and Sunday, the Greek government will have to choose which path to take. If on Monday it is not ready to ad accept the plan presented by creditors (albeit with some minor adjustments), it would probably do well to prepare an emergency plan to activate as soon as possible capital controls. Undoubtedly a pleasant and fitting start to the tourist season. While this may please the faction within Syriza that has said it prefers chaos to austerity, it may also catalyse opposition against the government and radicalise political confrontation within the country.
– At its entirely interlocutory meeting on Wednesday, the Fed did not announce any changes to its framework of monetary policy measures, and there were not dissenters. The most interesting shift affected the views of FOMC participants on rates. As expected, there was a widespread downward shift in median values, which reflects increased differences in opinions between Committee members: 0.63% at the end of 2015, and 1.625% from 1.875% at the end of 2016. In general, the FOMC expects “clearer evidence” of the strength of the recovery before kicking off its monetary restriction cycle. Forecasts for the end of 2016 show an extremely wide divergence in opinions, covering a range from 0.375% (indicated by a single member) to 2.875% (two members).
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