Athens remaining in eurozone most likely outcome

As expected the eurozone’s finance ministers – the Eurogroup – did not come to an agreement with Athens yesterday.

But the signals sent out after the Eurogroup’s meeting were positive. Athens have made sufficient concessions for further discussions over the next days that might end in a deal was the verdict of the Dutch chairman of the Eurogroup. A top EU commissioner was just reported by Bloomberg to have the same view.

There are probably a lot of devils in the detail that need to be sorted out, but it now seems likely that a deal can be signed after the Eurogroup meets again on Thursday, probably when the heads of states have their next meeting on Friday.

The deal will probably include some further tax hikes in Greece and a cut in Athens’s expenditure on pensioners. In return for these austerity measures, Greece will be promised a restructuring of the debt is owes to the EU, the ECB and the IMF and generous terms for a third bail-out package.

If so, the next hurdle (before the last tranche of the current bailout programme is paid out) is to get parliamentary approval in Athens, Berlin and some other capitals.

Politically this will probably work out, but time is running out – without a transfer from the institutions Athens in all likelihood doesn’t have enough euros to pay the IMF on Tuesday. If it’s all about parliamentary formalities and financial technicalities, though, the IMF is likely to offer Athens a grace period.

The main scenario, therefore, is Athens will not default and that Greece will stay in the eurozone.

But there is still the risk that negotiations this week may break down. If Thursday’s meeting ends on a sour note, there will probably be a bank run in Greece on Friday. If the ECB, citing a lack of progress in the negotiations, then denies the Bank of Greece massive extra Emergency Liquidity Assistance to Greek banks, the Greek government will probably impose capital controls late Friday or over the weekend. And Athens will not pay what it owes to the IMF on Tuesday.

Capital controls and a default on the IMF loan will not be the end of the story, though. Negotiations will continue and a deal might be reached before Athens has to make a large payment to the ECB on July 20.

But we are then entering uncharted territory, with possible civil unrest in Greece. The risk of a general default of all sovereign Greek debt and possibly a Greek divorce from the eurozone will be much higher when Tsipras is pressed up against the wall and negotiates from behind a capital control curtain.

 

Torgeir Hoien is portfolio manager at Skagen Funds

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