BAML conf call in Greece
I tuned in to this afternoon's call on Greece. Here is a quick summary of what was discussed and in between there is also my personal view on one two things.
The referendum will be about a "yes" or "no" on creditor porposals, although these will disappear from the table officially by Tue night, as the current programme runs out.
If "no" Greek gov believes their positions strengthens. However, the Greek President has said, he will resign, should Greeks vote no. And per constitution this would trigger new parliamentary elections.
If "yes" Greek gov might be forced to resign, as is hard to see them signing a deal they don't believe in.
On why it all fell apart, while it looked sort of positive over the last two weeks, two reasons were mentioned:
1) IMF was unhappy that most Greek measures put fwd were rating to tax hikes.
2) Greek proposal was conditional on debt relief, while creditors wanted to discuss this in Sep as part of negotiation of a 3rd MoU.
BAML see a "no" vote increasing tail risk for mkts, while a "yes" vote increases political risk (gov resignation etc).
Major problem is that once Greece is in default to the IMF (1.6bn to repay on 30th June and Lagarde already said she won't allow a 30 day grace period to Greece before she reports non payment to the IMF board), the ESM can call in all their loans (abt 130bn). This would the put GGB's officially into sov default.
From the ECB's viewpoint there are two ways of capital controls (mind you we do not know yet if banks open tom mrng or not, an official statement is expected later tdy).
1) Cyprus style "mild" controls, that come with a cap on withdrawals, surveillance of intl payments, while pensions and gov workers get paid.
2) Hard capital controls, whereby banks shut down completely, paralysis and tough social consequences, Argentina style.
However, the ECB has NO say in the matter. The Greek gov has to take this decision. Risk is Greek gov goes for the tougher one and blames the ECB.
The ELA amount has been put on freeze, it remains at the same lvl at least until Tuesday night.
The Eurogroup's view point that the proposals to Greece are not fully valid any more should be taken with a pinch of salt. The Eurogroup will surely not ignore a "yes" vote by the Greek people. However, implementation of the consequences of a "yes" vote will hardly be done by the current Greek gov. BAML see in this case transitional measures and more money drip feeding.
On a "no" vote we go into uncharted territory. The Eurogroup sees a "Grexit" as a potential choice of the Greek side.
The ECB is seen as now having the finger on the trigger for more QE. Not only because of Greece but now especially because of current developments. After all rates are already higher than when QE began.
Should peripheral yields rise substantially from here the ECB will likely openly announce that they are doing more QE. Should spreads widen too much the ECB might tweak QE more towards the most under pressure mkts, while doing less Bunds for example.
As far as mkt reactions are concerned, equities are expected lower but BAML see a buying opportunity, especially as they see the ECB doing more QE. Furthermore, they see it as a buying opportunity as the mkt has cleaned up a bit on positioning.
On EUR not much was said by BAML. I expect it lower, personally, possibly testing 1.0880 tom, as mkts will look at tail risk first.
Asked abt a potential intervention lvl with respect to yields BAML had no real answer apart from the fact that they expect absolute yields to matter more than spreads to Bunds.
Last thing, polls on the referendum (there are not many out yet), so far show 57% yes. This is in line with my personal opinion that all public servants who formerly voted Pasok and this time opportunistically voted Syriza, will vote for their salaries to be paid in EUR (even if it's less EUR one more time) rather than than taking a shot in the dark.