Athens announces it will miss IMF payment - HSBC

5 June 2015

For Professional Clients and Institutional Investors

Athens announces it will miss IMF payment

Greece has confirmed it will miss its EUR 301m payment What’s more, both sides continue to disagree over Greece’s
due to the IMF today. This does not constitute a default future fiscal path. Latest reports suggest both sides have made
event as the IMF has agreed to bundle its loans towards the progress on agreeing a primary budget surplus (excluding debt
end of the month. Nevertheless, a deal with creditors is still interest payments) of as much as 3.5% of GDP in the medium
required to pay the IMF back, with the main sticking points term, although the creditors target of 1% this year – submitted
being over pension reform and VAT increases. in a plan on June 3 - is higher than Athens’ proposal of 0.6%.
The IMF has been particularly vocal in requiring Greece to be
Our base case scenario remains that some form of set on a path of fiscal sustainability.
agreement is finalised in the next few days or weeks.
However, many hurdles remain, not least any agreed plan Potential scenarios
being pushed through the Greek parliament or even
presented to the Greek population as a referendum. The fact that Athens has missed a repayment to the IMF does
not constitute a default event for Greece. Although rarely used,
The facts the IMF typically agrees to bundle its loans towards the end of
the calendar month, buying the country some much needed
Athens has missed its EUR 301m IMF repayment due today. time. Only if payment has not been received one month after
Whilst this is not a disaster for Greece - the IMF has agreed to this would the IMF board be formally informed and Greece
bundle its loans towards the end of the month - time is clearly would then be classified as in arrears and locked out of further
running out. Greece’s current bailout package expires on June IMF financing.
30 (having been extended in March) and a deal remains elusive
between the left-wing anti-austerity Syriza party and bailout This scenario would then present a number of challenges. First,
monitors (ECB, IMF, EU) to release the last tranche of financing Greece is likely to require a third bailout package which could
worth EUR 7.2bn. Greece was only able to repay EUR 750m to prove difficult without IMF involvement. Second, the ECB could
the IMF on 12 May by tapping into its emergency Special classify the Greek government as insolvent, effectively shutting
Drawing Rights (SDR) account held with the IMF and is unlikely Greek banks out of the Emergency Liquidity Assistance (ELA)
to be able to fully service its further obligations without these programme as government guaranteed bonds are used as
funds being unlocked. collateral. This could cripple the Greek banking sector,
especially as deposit withdrawals have already increased at an
The two sides of the negotiations remain in deadlock over the alarming rate in recent weeks, and most likely lead to the
extent to which Greece needs to reform its economy. On 1 imposition of capital controls and potentially even exit from the
June, Alexis Tsipras, the Greek prime minister submitted a plan single currency (Grexit) if no subsequent deal can be struck.
to the bailout monitors which, according to news reports, makes Nevertheless, the ECB could also decide to keep the ELA
concessions around VAT reform, increasing the age of lifeline open, especially if it considers this to be in the best
retirement to reduce pension spending (the state pension fund interests of the Eurozone.
is currently EUR 300m in deficit) and restarting the
government’s stalled privatisation programme. However, the Third, the European Financial Stability Fund (EFSF) - the
plan is unlikely to include other measures seen as crucial by largest single creditor to Greece - could exercise its right to
Greece’s creditors such as reducing supplementary pension demand all outstanding loans made to Greece be repaid
payments, increasing VAT on power bills and structural labour immediately. This in turn could accelerate the repayment of
market reforms such as allowing the mass firing of workers. debt held by other creditors, even leading to an outright
Such issues are particularly important to far-left sections of the sovereign default.
Syriza party which have established a “red line” over closing the
pension deficit, generally seen as a major stumbling block to
progress.

Figure 1: Greek debt repayment schedule Also, a partial recovery in the euro, in part due to weak Q1 US data,
would have forced unwinding of some carry trade activity.
Nevertheless, Greece related sentiment has undoubtedly
contributed to rising volatility in equity markets - intraday stock
swings on the Eurostoxx 50 are at their highest levels since
January.

Finally, gold prices, a key perceived ‘safe-haven’ asset, have been
hovering around the $1,200/oz level since April seemingly
unaffected by the Greece talks. Although this could suggest that
investors remain confident a deal can be struck, it may also reflect
that global risk appetite is generally high, reducing demand for the
precious metal in key markets such as China. Indeed, China's net
gold imports from Hong Kong (a main conduit) fell to an eight-
month low in April.

Source: HSBC Global Asset Management, HSBC Global Research Investment implications

However, even if delayed payments to the IMF don’t prompt ECB The failure of Greece so far to reach a deal does not alter our
and EFSF action, Greece still faces a EUR 3.6bn ECB repayment investment views for 2015 and beyond. Our central scenario is still
on July 20 (the EUR 5.8bn of short-term treasury bills due before that we expect a deal to be made as both sides have too much to
then can be rolled over). If no deal is reached by then, this would lose from Grexit, with non-payment to the IMF on June 5 in any
be a more likely trigger for a substantial escalation in the crisis case not constituting an outright default event.
leading possibly even to Grexit.
Even in an extreme downside scenario where no agreement can be
However, our base case remains that both side eventually give reached and Greece eventually exits the euro, although we would
enough ground for a deal to be struck, with the delayed IMF expect a short-term increase in volatility and a sell off in risk assets,
payment being used as a negotiating tactic by the Greek in the long-term the economic impacts to the rest of Europe should
government. Nevertheless, the agreed plan would then need to be limited. Most Greek debt is now held by official creditors, and
be pushed through the Greek parliament, presenting another banks’ exposure should be cushioned by stronger capital buffers as
potentially tricky hurdle to the disbursement of funds. A part of ongoing Basel III requirements. Furthermore, EU institutions
referendum which supported remaining in the euro could provide such as the European Stability Mechanism (ESM) and European
the Greek government with extra support in this process, however Banking Union (EBU) have been established to help deal with such
it is unclear if this can be arranged in time. Furthermore, although eventualities. We would expect some pressure on peripheral bond
these funds would resolve immediate funding problems, a new yields in such a scenario. However, it is also important to bear in
bailout package would still then need to be negotiated, potentially mind that public finances have improved in other periphery
dragging on for weeks. countries compared to a few years ago and a number of reforms
have been implemented improving the underlying dynamics of
Market impact these economies.

So far markets have been relatively sanguine about the stalemate From a long term perspective, we remain overweight risk assets,
in talks. Greek 10 year bond yields have trended upward since including European equities, within globally diversified multi-asset
the election of Syriza in late January, but remain well below the portfolios. The ECB is continuing its QE programme during a period
spike to 37% seen in 2012. However, this may reflect liquidity of economic recovery with falling unemployment and low inflation
issues currently affecting bond markets more generally, and also supporting consumer spending in particular. However, in the short
that the majority of Greek debt is now held by organisations such term there could be more volatility in European asset markets as
as the ECB and IMF rather than private investors. Peripheral negotiations with Greece continue over the next few days and
bond yields and German bund yields have risen since April, weeks.
although again they remain well below 2012 levels, and may also
reflect improving confidence in the Eurozone economy as well as
higher inflation expectations, helped in part by a small recovery in
oil prices.

European equity markets have also weakened slightly since April,
potentially linked to fears over the Greece impasse. However,
during this period investors may have also pared back their
expectations around ECB loosening (and hence support for
equities) as inflation and economic activity has picked up.
Furthermore, increased bond-market volatility should have forced
investors to shed some risky assets from their portfolios.

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