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BofA FX strategist Athanasios Vamvakidis is out with a new note titled Greece In The Next Few Weeks.Right now, the “base case” is that Greece hangs on.
A successful conclusion of the review is our baseline scenario. Assuming Greece chooses to implement the required reforms, we believe that the Eurozone will be able to eventually address political constrains for increasing Greek funding once more. For the ongoing program review, the Eurozone governments can give their commitment to cover any funding gap looking forward. To ensure debt sustainability, the Eurozone could provide funds for bank recapitalization directly from the ESM, as they plan to do for Spain. In any case, the decision for the first review tranche will have to take place by early October, as the Greek government could soon run into liquidity problems. What happens after this review will again depend on program implementation.
But vamvakidis lays out 5 things that could go wrong in the next few weeks, as the country begins its attempt in earnest to renegotiate its bailout, something that needs to happen for it to not run out of cash and be forced out of the Eurozone.
Five things can go wrong in Greece in the next few weeks, in our view. The coalition government could fail to agree on the new austerity package. The Greek Parliament could fail to approve the proposed austerity package. Implementation problems could continue after Parliament approval. Social unrest could get out of control. And some Eurozone members could oppose further commitment to increase funding for Greece. We believe that Greece’s survival in the Eurozone could be at risk if any of these risks lead to a failure of the new program.
Two of those possibilities are particularly interesting, and are worth fleshing out:
The Greek Parliament could fail to approve the proposed austerity package. Even if the coalition leaders agree, their parliamentarians may not follow the party line. Indeed, the Greek government has lost parliamentarians in all major parliament votes during recent program reviews. The coalition government has a large majority margin, with 179 out of 300 seats, but the previous coalition government lost 45 out of 244 parliamentarians in the February parliamentary vote for the new program. If a parliamentarian resigns, his/her replacement can then vote in support of the program. However, a parliamentarian may also choose to remain in the Parliament as independent, or join an opposition party. If the Parliament fails to approve what is required for the conclusion of the first review, the coalition government could fall, or call a referendum on the Euro. We do not expect the Troika to be able to disburse the next tranche in this case.
Social unrest could get out of control. Protests against the Greek program have become more violent in recent reviews. Although Greece just went through two elections that led to a pro-European government and the vast majority of the public continues supporting staying in the Eurozone in recent polls, the deepening recession, high youth unemployment (about 50%), and an anti-austerity opposition (Syriza) are likely to fuel strong protests in September, particularly during the parliamentary vote. Even if social unrest remains contained, such protests tend to increase uncertainty about Greece’s ability to reform and survive in the Eurozone, with market implications beyond Greece. In an extreme scenario, social unrest could even threaten the coalition government.
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