The good, the bad and the ugly scenarios in Greece
Wednesday, 25 March 2015 10:53 Written by Intelligent News Published in News Analysis
© Michalis Tezaris | Intelligent News
Greece has two weeks to demonstrate a strong commitment to reforms. Time for Tsipras to be Greece's Lula?
As the Greek government is about to run out of its cash buffers, it
has only two weeks to persuade the rest of Europe of its commitment to
reforms. Now may be the time for Prime Minister Tsipras to show to the
rest of the world that he is Greece's Lula, Brazil's former union leader
from the left, who became President and was credited with impressive
economic performance despite initial market concerns, Bank of America Merrill Lynch report says.
The firm argues that a strong commitment to reforms will be what could cut Greece's Gordian knot. The reform list in the Eurogroup agreement of February 20 is a very good starting point in our view. These reforms could allow an agreement on new official loans, help address tail risks, and increase long-term potential growth.
The good scenario is the Lula scenario, in which Greece commits and implements key reforms, stays in the Eurozone, starts seeing positive growth surprises, and re-gains market access.
The bad scenario is another effort to "kick the can down the road", with Greece doing just enough to persuade the rest of Europe to keep the country in the Eurozone and the Europeans giving to Greece just enough loans to repay existing loans; we argue that this scenario is not sustainable.
And the ugly scenario, in which there is no deal between Greece and the European institutions, leading to a bank run, capital controls, and eventually Euro exit. It could also be the case that triggering the bad, or even the ugly scenario would force a political consensus in Greece to move to the good scenario, but the situation will likely have deteriorated substantially in the meantime.
Bank of America Merrill Lynch baseline scenario remains that Greece will choose to reform and will therefore, stay in the Euro, but brinkmanship so far suggests to us that risks for the bad and ugly scenarios have increased. They are concerned that a negative shock may be necessary to force a consensus in Greece to implement the reforms that the country needs. Bank of America Merrill Lynch optimistic baseline scenario is based on the strong support for the Euro in Greek polls.
However, they mention that it has been on the way towards a negative scenario so far and something has to change in the negotiations to bring Greece back on track.
The firm argues that a strong commitment to reforms will be what could cut Greece's Gordian knot. The reform list in the Eurogroup agreement of February 20 is a very good starting point in our view. These reforms could allow an agreement on new official loans, help address tail risks, and increase long-term potential growth.
The end of the road
According to the report, Europe and Greece may not be able to "kick the can down the road" beyond June. The European governments will need to approve a new program for Greece that will include new official loans. The Greek parliament will have to approve new measures and reforms, some of which could be unpopular and against pre-election promises. The Greek government needs to demonstrate a genuine reform effort to persuade the European parliaments to approve more loans. Otherwise, we argue that Greece will be eventually forced to exit the euro.Three possible scenarios
Bank of America Merrill Lynch consider three possible scenarios:The good scenario is the Lula scenario, in which Greece commits and implements key reforms, stays in the Eurozone, starts seeing positive growth surprises, and re-gains market access.
The bad scenario is another effort to "kick the can down the road", with Greece doing just enough to persuade the rest of Europe to keep the country in the Eurozone and the Europeans giving to Greece just enough loans to repay existing loans; we argue that this scenario is not sustainable.
And the ugly scenario, in which there is no deal between Greece and the European institutions, leading to a bank run, capital controls, and eventually Euro exit. It could also be the case that triggering the bad, or even the ugly scenario would force a political consensus in Greece to move to the good scenario, but the situation will likely have deteriorated substantially in the meantime.
Bank of America Merrill Lynch baseline scenario remains that Greece will choose to reform and will therefore, stay in the Euro, but brinkmanship so far suggests to us that risks for the bad and ugly scenarios have increased. They are concerned that a negative shock may be necessary to force a consensus in Greece to implement the reforms that the country needs. Bank of America Merrill Lynch optimistic baseline scenario is based on the strong support for the Euro in Greek polls.
However, they mention that it has been on the way towards a negative scenario so far and something has to change in the negotiations to bring Greece back on track.