Greece crisis: Capital controls only slow but do not stop the flight of deposits – BBH

FXStreet (Barcelona) – The Brown Brothers Harriman Team shares their observations on the Greece referendum, capital controls, the ECB repayment and the credit risk ahead for the nation.

Key Quotes

“While the Greek bank holiday is expected to last through next Monday, the day after the referendum, the risk is that it lasts longer. On a “no vote” it is clear that the ECB would not increase the ELA, but even on a “yes vote”, without an aid package, the ECB may also not be in a position to increase ELA immediately. In fact, on a “yes vote”, the economic and financial crisis will turn into a political crisis. Tsipras has indicated that he does not want to be the prime minister to implement the creditors’ program, even though as Juncker noted, he accepts most of it.”

“The capital controls only slow but do not stop the flight of deposits. The economy is collapsing. What was a liquidity crisis may be transformed into a solvency crisis, which would also limit the ECB’s ability to expand the ELA facility.”

“There continues to be much talk about the significance of the debt payment due to the ECB on July 20. This seems to be still focusing on the sovereign debt obligations without appreciating the other sources of pressure that makes it unlikely that the situation can persist that long. There is a private sector obligation due earlier in the form of the JPY200 bln Samurai (~145 mln euros) that matures in the middle of July. This one, unlike the missed payment to the IMF, would likely be a credit event.”

“Even this risk is too far in the future. Consider how the government will pay the 600k public workers. There has been some indication that the government will issue IOUs, which some will see as the embryonic form of a new or parallel currency, though this was not the case when the previous Governor of California issued IOUs to pay the state’s obligations.”

“We do not know how long the Greek economy can function without an operating banking system, but we suspect it is less than three weeks when the ECB payment is due. Moreover, it should not be forgotten that part of the Greek banks core capital was tax deferred assets, which can hardly be used to pay depositors. The Cypriot experience where depositors were bailed-in also fans fears.”

The Brown Brothers Harriman Team shares their observations on the Greece referendum, capital controls, the ECB repayment and the credit risk ahead for the nation.

(Market News Provided by FXstreet)