«Without ECB’s help no more Euro in Greece»

Charles Wyplosz, Professor for International Economics in Geneva, says there is no alternative to a Grexit if Greek voters say No to the demands of the country’s creditors in the referendum called for next Sunday.

Charles Wyplosz, Professor for International Economics in Geneva, blames Greece and its counterparts to have poisoned negotiations with too much politics losing sight of the economic issues. The IMF, the Eurogroup and the European Central Bank (ECB) crossed the red lines of Greece instead of coming up with economically sensible and possible compromises. In case of a No in the referendum next Sunday, Greece is set to leave the Euro, Wypolosz says, since the ECB would have to stop its Emergency Liquidity Access (ELA). By the 30th of June, this Tuesday, the second program for Greece ends without disburesment of the remaining funds and the country won’t be able to pay 1,6 Bio. € to the International Monetary Fund (IMF).

Mr. Wyplosz, what are the chances Greece can still find an agreement with its creditors? Does the referendum of the 5th July exclude an agreement until the outcome of the referendum is clear?

It is hard to see how negotiations could re-start until the referendum. This means that Greece will default on the IMF loan tomorrow Tuesday. Then, if the referendum is a No to the conditions asked from Greece and if the ECB keeps refusing to provide liquidity to banks, there is no alternative to a Grexit.

What would your advice be to get out of this mess?

It would always have been easy to find an agreement between Greece and its European creditors. Both sides, however, have politicized the negotiations to the point where economic issues have become secondary. The Europeans could have asked for a balanced primary budget, not a surplus, for reforms of the largely unreformed product markets including reducing bureaucratic hurdles, and for a continuation in the improvement of tax collection. Instead they chose to cross the red lines of the Greek government on pensions and Value Added Tax. The Greek government could have worked out these proposals itself, but never did.

The creditors hinted at the possibility to discuss a debt relief, once Greece accepts their requirements of reforms and austerity

A debt write-down is unavoidable. It makes little sense to keep delaying negotiations. That should be the starting point, not a vague promise.

How effective will capital controls be?

The most important measure are not capital controls but limits on bank deposit withdrawals. If well administered, they could stop the hemorrhage of bank deposits and thus reduce the need for ECB provision of liquidity. But, at best, this gives some limited space before either a resumption of liquidity assistance by the ECB or a Grexit.

What happens at the end of the month if Greece won’t pay the IMF?

Not much. The IMF will take some time to formally declare Greece in arrears and then suspend the country’s membership.

The Euro Group seemed bewildered by the moves of the Greek Premier Tsipras to end the negotiations and call for a referendum. Did they underestimate the probability Greece would go so far?

Yes, they have always underestimated the Greek democracy. Tsipras was elected on a mandate they do not like, but this is the will of the people. They failed to respect this will and the commitment of the Greek government. No one should be bewildered, there have long been discussions about a possible referendum.

The Eurogroup didn’t agree on a haircut. Will it now have to come anyway or will the Euro countries wait and see how much Greece will repay them?

Once Greece starts defaulting on maturing loans, this amounts to a haircut.  But even if the Greek don’t pay now, they can do so in the future. That has happened repeatedly before, for example with Argentina. So, eventually, Greece will honor its debt to the IMF and to private investors. How much of the debt to European officials like the ECB, governments and the EFSF will be repaid is to be determined through negotiations, but I suppose that the write-down will be substantial.

How do you judge the decision by the ECB to stick with the current level of ELA, but not to increase it further? Shouldn’t the ECB rather decide whether the Greek Banking System is still solvent and to stop ELA if the answer is «no» but to provide all the liquidity needed if the answer is «yes»?

The ECB has effectively stopped providing fresh liquidity, since the existing ELA-loans seem to have reached the ceiling, or to be close to it. The Greek banks are likely insolvent because of the bank run that started slowly months ago and picked up speed. The issue now is to recapitalize the banks, for which ECB cash is absolutely necessary.

What are the most likely next steps? How big are the risks of a Grexit?

Unless the ECB resumes liquidity assistance, Grexit is unavoidable. No country can function without a banking system and no banking system can function without a lender of last resort.

The SNB seems to have intervened in the market on Monday. What implications do you see for the SNB for the next weeks?

It is unclear whether a Grexit will weaken or strengthen the euro. The markets could first bring the euro down, which would be bad for the SNB (SNBN 4810 0.21%) in its fight against a too strong Franc, and then up as they decide that a thorn has been removed. The latter would be positive for the SNB.