Following the note on 29 June, analysing the imposition of capital controls in Greece, this note sets out the latest general developments in Greece.

Headlines

  • On Tuesday, 30 June Greece failed to make a €1.6bn payment due to the IMF, the first advanced country to do so. Given the Greek government’s current stand-off with its creditors, Greece now has little incentive to prioritise its international debts ahead of mounting internal fiscal pressures. 
  • An emergency Eurogroup meeting was held on Tuesday at which hopes of a last minute deal were shattered and a referendum was called for on Sunday, 5 July. The Eurogroup agreed not to hold further negotiations with Greece before the referendum.
  • The EFSF officially expired on Tuesday night. The last EFSF tranche of €1.8bn will no longer be available for Greece and the €10.9bn in EFSF notes to cover the cost of bank re-capitalisation / resolution has been cancelled.
  • The bank holiday, capital controls and suspension of trading of the ATHEX continue through the week. The bank holiday is due to end on Tuesday morning. Unsettled transactions on ATHEX from trades last week have been allowed to clear. Regardless of the outcome of Sunday’s vote, unless new ELA funds are made available to Greek banks, it is unclear on what basis they can reopen on Tuesday.
  • The Luxembourg Stock exchange has suspended trading in the bonds of the National Bank of Greece, Alphabank, Eurobank, Piraeus Bank, the Hellenic Railways Organisation and the Hellenic Republic listed on the Luxembourg Stock Exchange.
  • The Hellenic Capital Market Commission imposed a prohibition on short selling instruments listed on ATHEX and EN.A until Monday, 6 July. For more information on this prohibition, see here.

Overview

The developments and potential risks and challenges summarised here are complex and evolving rapidly. For more detailed guidance please speak to your Freshfields’ relationship contact.

Where are we now? In the midst of a bank holiday, capital controls and political tension, the Greek electorate is getting ready to vote on Sunday, 5 July on the referendum announced by Alexis Tsipras last Friday.

What to expect this weekend. Greeks are to vote on Sunday on whether Greece should accept proposals submitted by its creditors on 25 June. More specifically, the vote is on whether they “accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25 which consists of two documents: The Reforms for the Completion of the Current Program and Beyond and The Preliminary Debt Sustainability Analysis.”

The question being voted upon is not simple, and is certainly not the direct question of “should Greece exit the euro”, although this may be one of the consequences of a “No” vote.

According to a leaked poll prepared by GPO, support for “Yes” on Sunday’s referendum leads the race at 47.1%, compared to the 43.2% in favour of “No”.

What’s the status of the negotiations? After a week of last minute negotiations and rumours of 11th hour deals, the Eurogroup has frozen negotiations until the referendum has taken place. The Greek PM requested the following from the Eurogroup: (i) the extension of the current programme in order to avert a technical default; (ii) a 2-year loan of approximately €30bn from the ESM exclusively for the service of debt repayments; and (iii) debt-relief measures. The Eurogroup did not accept these requests.

What does the missed payment to the IMF mean? Under the IMF rules, the managing director has some leeway (1 month) before officially registering the non-payment as a default with the IMF’s executive board. Default to the IMF is not a credit event for market-held debt (e.g. government bonds, credit default swaps, etc.), according to credit rating agencies. However, the non-payment gave the EFSF the option to accelerate its own €131bn loans to Greece. That could, in turn, trigger cross-default clauses for Greek debt. Following the missed payment, Fitch, Moody’s and S&P downgraded Greece to 'CC', 'Caa3' and 'CCC', respectively.

What’s the latest on the extended bank holiday and capital controls? The Act of Legislative Decree instituting the “Short Term Bank Holiday” was amended to allow for: (i) the opening of a limited number of branches to cater for the payment of pensions; (ii) the acceptance of deposits; and (iii) the issuance of new credit and debit cards. Under the amended act, a person who denies payment via debit, credit or pre-paid cards or online and telephone banking, may face criminal charges.

What’s next?

  • Next week’s position will depend firstly on the outcome of the referendum:

A “Yes” outcome is expected to initiate rapid political developments including, potentially, the formation of a ‘government of national unity’ and/or elections in the short- or medium- term. The government has publicly committed to step down in the event of a “Yes” outcome.

In the event of a “No” outcome, the government has vowed to return to the negotiation table, promising a better deal with creditors for the country. For European leaders and local opposition, however, a “No” outcome would obstruct the possibility of a new agreement and even precipitate a Grexit.

  • Key dates this month
    • July 8: Greece to sell 26-week bills 
    • July 10: Greece due to refinance €2bn in treasury bills 
    • July 13: IMF loan repayment of €450m due and scheduled Eurogroup meeting 
    • July 14: Greece due to repay Samurai Yen loans of JPY11.67bn (~$94m) 
    • July 16: Governing Council monetary policy meeting of the ECB in Frankfurt 
    • July 17: Greece due to pay €71m in interest on the 3-year bond it sold in 2014 and to refinance €1bn in T-bills 
    • July 20: Greece due to repay € 3.5bn of bonds held by the ECB 

Is Grexit getting closer? Political brinkmanship and deteriorating public and private finances have raised the fear of Grexit to new heights. Under either referendum outcome, the financial position of the Greek state and banking system will prove determinative. The state’s increasing inability to meet its obligations as they fall due and to support its own banking system may precipitate the emergence of a parallel currency and a de facto break from Europe.