Greece deal: A well-calibrated strategy or tactics to precipitate an accident? – RBS

FXStreet (Barcelona) - Richard Barwell, Senior European Economist at RBS, refutes to have ‘Grexit’ as a base case, but notes that the probabilities of a default and ultimately exit are both rising with the endless delays and tactical mis-steps.

Key Quotes

“We do not believe that the ECB will be able to keep the Greek banks on liquidity life support indefinitely and irrespective of the facts on the ground. If there is a run on the banks and the government is forced to erect capital controls then the Greek people may be asked to confirm their support for keeping the euro when the price is accepting a ‘take it or leave it’ offer from the creditors in a fast-deteriorating economic situation."

“It is possible that the players understand the game and that the risks from delay are over-stated – bank runs and capital controls are a tail risk – or that the players are sufficiently nimble such that an agreement will be reached as soon as the risks of delay start to escalate."

“However, we cannot rule out the possibility that one or both parties (depending on your perspective) are not playing a well-calibrated strategy but are instead unwittingly following tactics which could precipitate an accident which could ultimately lead to the bad outcome. As time passes, we regretfully raise the probability we attach to an accident.”

“For example, the Greek government may believe that come what may, the ECB will be ready, willing and able provide lender of last resort funding 'beyond Bagehot' to the banks. Indeed, we sense that many market participants have some sympathy with that view: the ECB will never pull the plug.”

“We do not share that view; we believe that the ECB will hang on as long as it can – and Lender of Last Resort is always an art rather than a science – but we believe that good intentions can only go so far”

“We remain of the view that it is in Greece’s interests to stay in the currency union and to reach an agreement with her creditors, and we believe that the creditors and the ECB have no interest in unnecessarily precipitating a crisis or forcing an exit."

“Our base case is not Grexit but the probabilities of a default and ultimately exit are both rising with the endless delays and tactical mis-steps.”