Why Grexit is the most likely outcome
1. Greece is already in default to the IMF
Last week, Greece defaulted on its obligations to the IMF, even if we technically would need to say it was put in“arrears”. Greece is the first developed country to do so. Currently, the Greek banking system is dependent on the ECB allowing the Greek Central Bank to issue loans to Greek banks through a scheme called Emergency Liquidity Assistance (ELA). As the name suggests, this funding can only be provided to deal with liquidity problems, so it cannot prop up insolvent banks. Greek banks are intimately linked with the insolvent Greek state, meaning they are insolvent themselves, meaning in turn that the ECB would need to cut off funding.
The necessary two thirds majority needed within the ECB Governing Council to block the Greek Central Bank from creating euros to lend to Greek banks under ELA hasn’t been reached so far. As a result, the ECB has had to come up with all kinds of excuses, the latest being that it will only cut off ELA funding for Greek banks in case there is “no prospect of a deal”. The ECB’s excuses are likely to run out soon, especially if the Greek government defaults on payments to the ECB on 20 July. This week, the ECB restrained ELA a little more, but it’s expected to provide ELA funding at least until Sunday. Political cover would be needed for any further actions though.
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