DailyFX.com -
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The threat of a Greek sovereign debt default has grown significantly on lack of progress
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Fears of a default may be self-fulfilling as investors flee Greek banking system
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Volatility seems nearly guaranteed ahead of critical dates between April 9-16
Greece is fast running out of cash as it negotiates a third bailout with the Euro Working Group, and the stakes are as high as ever ahead of critical deadlines next week. What are the major risks? And why should traders control position size and leverage across Euro pairs?
Volatility Risk is Substantial as Greece nears potential default, exit from Euro Zone
If Greece fails to secure additional bailout, it will run out of money and go into default—likely forcing it to exit the Euro Zone and causing great disorder across financial markets. Estimates vary, but we view the risk of a Greek default high between the period of April 9-16.
Near-term Timeline Highlights April 9-16 as critical Period
April 9 - Greece is to pay €460m to the IMF under terms of first bailout agreement.
April 13 – €1,400m of short-term Greek Treasury Bills mature, forcing Greece to roll over into new debt but clear uncertainty surrounding debt negotiations makes strong investor demand unlikely.
April 16 – Another €1,000m of Greek Treasury Bills mature.
April 9 is a key date as the Greek government is to repay €460m to the International Monetary Fund under the terms of its 2010 bailout agreement. Missing this payment would push the government into default and likely cause great disorder across FX and broader financial markets.
German newspaper Der Spiegel quoted Greek Interior Minister Nikos Voutsis as saying that Greece could skip its payment to the IMF on April 9 in order to pay domestic salaries and pensions. A subsequent Reuters report said that the Greek government denied it would delay its April 9 payment. Uncertainty clearly reigns, and the double-speak suggests recent statements may be pure gamesmanship as it jockeys for a better deal from the Euro Working Group.
But even the threat of default could force a domestic bank run and force the Greek government to institute capital controls in the absence of a larger backstop from the European Central Bank.
Volatility Risk Grows Substantially as Key Dates Approach
The greatest volatility risk in the Euro and financial markets comes from pure uncertainty, and persistent indecision heightens the risks on a daily basis.
Key Risks on Uncertainty:
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The threat of a Greek default heightens the risks of a bank run as investors flee domestic banks.
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The European Central Bank currently provides emergency loans to Greek banks but cannot continue to do so in the case of Greek sovereign default.
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Greece likely to implement aggressive capital controls on the event it defaults in order to keep capital from fleeing the country. Fear of a bank run is self-fulfilling as risk-averse investors scramble to recover deposits.
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The National Bank of Greece showed €115 billion in assets on its balance sheet as of Q4, 2014, representing over 60 percent of domestic Gross Domestic Product (2013).
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The Greek economy could enter aggressive recession if financial system fails.
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Eventually the fear of a bank run could force a Greek sovereign debt default in itself.