Photo: Bloomberg TV
In a note out today, Jefferies’ David Zervos previews a potentially big event int he weeks ahead. The question is: Will the European central bank system keep lending to Greek banks if the bailout agreement is rejected.The important point here is that Greece’s ability to stay in the Euro rests squarely on the solvency of the BoG (Bank of Greece), which in turn comes from unfettered access to Target2. Greece is only forced to leave the Eurosystem when the European powers determine that lending to the BoG is too risky. How, when and why they pull the plug will be one of the greatest European political decisions of all time – but make no mistake, the executioner for Greece will be the ECB. Who gives the execution however order will be shrouded in mystery forever. The Germans will blame the Greeks, the Greeks will blame the Germans, the socialists will blame the conservatives, Tsipras will blame the Merkel and so on….
Basically, the decision to lock the Greeks out of the Target2 is the single most important decision that will be made in the history of EMU. Can Europe send 65b to Greece to recap the banks when after they vote down the MoU? Can Europe stand idly by when Tsipras calls for an OSI on the 240b of debt held by the ECB and IMF. Can Europe watch Tsipras hire 100,000 civil servants? And the real question is – can Europe continue to watch Greeks pull Euros out of the banks, thereby taking the Eurosystem Target2 exposure to 150b, 200b and then 250b without cutting off the BoG?