Why deadlines are pointless when it comes to Greece

Louisa Gouliamaki| AFP | Getty Images

Anyone who's followed Greece for the last few years knows it is pretty pointless to talk about deadlines.

If it isn't the 11th hour with Greece, it isn't happening. There are now eight days left until June 5, when the country must pay the International Monetary Fund 300 million euros ($328 million).

Despite cries from various factions within the Athens government that "we won't, we can't or we shouldn't pay" - Greek finance minister Yanis Varoufakis has said they will pay IMF and that a deal has been signed with creditors.

Reports from sources close to the talks suggest a Staff Level Accord (SLA) between the Greek government and its creditors is being crafted today. It could still take up to a month for Greece to get access to some or all of the 7.2 billion euros in the cash disbursement but a SLA may be enough for the European Central Bank to remove its controls on how many T-bills can be issued, currently set at 15 billion euros.

That's the best case scenario.

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Sources close to the government now argue that If agreement from the IMF were not required, they would have already closed the deal. Some might argue that keeping the IMF happy and on board is Greece's best way to maintain pressure for debt writedowns, but still.

So for whatever the reason, what if we don't get a deal? I cannot tell you if June 5th constitutes the 11th hour for Greece but what I can tell you is that despite some reports to the contrary, missing that IMF payment is not a default.

The IMF waits for one month before notifying it's board that money hasn't been received and for ratings agency like Stand & Poor's, Fitch and DBRS it is not considered a credit event.

That's the good news.

Default by any other name

Unfortunately for Greece the bad news is written in the so called Master Financial Assistance Facility Agreement – otherwise known as the extension deal they signed back in February. It states that the European Union's emergency cash lifeline, the European Financial Stability Fund (EFSF), has the right to demand all outstanding loans made to Greece be repaid immediately if the IMF payment is missed. So far Athens has borrowed just over 140 billion euros.

It gets worse. As UBS points out: "Non-payment to the IMF causes an acceleration of amounts due to the EFSF, which in turn could accelerate repayment of bonds if as would seem likely they were also left unpaid."

Should the EFSF decide to trigger this acceleration, and it is discretionary not automatic, Greece is surely then on a fast track to default.

Do I think it will happen? Of course not. Similarly to the ECB and their provision of emergency liquidity assistance, the EFSF is not going to pull the plug on Greece and undermine the political decision making process. But between Germany, the ECB, the IMF and the EFSF that feels like a whole lot of leverage.

Impact on depositors

Just because a missed IMF payment isn't a default and even if selling pressure is limiting to Greek assets, it doesn't mean we can ignore the signal a missed payment would sent to Greek depositors. Moody's estimates more than 30 billion euros or 18 percent of deposits has been removed from the banks in the last few months. I have to admit that the extent of outflow is less surprising to me that just how much cash remains.

Deposit outflows have re-accelerated according to various Greek media reports to 300 million euros per day from 100 million euros last week. This may not threaten the immediate liquidity position of Greek banks, but with little data available to judge their situation combined with the ECB's decision today not to raise the ELA limit it can only add to uncertainty.

Enough justification surely for unsubstantiated chatter earlier this week for a one off balloon payment to the IMF at the end of June for 1.6 billion rather than four payments during the month.

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To underscore the heightened risk Mohamed El-Erian told CNBC this week he now puts the probability of a Greek accident at 55 percent to 60 percent.

A 'Gr-accident' has already happened

While officials seemingly work out how best to kick the can down the road, Greece's economy suffers.

As Konstantinos Venetis at Lombard Street research points out 'the real 'Gr-accident' has already happened. The economy relapsed into technical recession in Q1 and while the primary balance was positive (2.2 billion euros) in the year to April, it practically masks a 'domestic default', mirrored in rising state arrears and an expenditure freeze over the same period amounting to some 2 billion euros. Unsurprisingly, NPLs are on the rise again, while bank lending is missing in action.'

The Hellenic Confederation of Commerce and Enterprises (ESEE) estimates each day the negotiations drag on the economy loses 22.3 million euros while an average of 59 firms close and 613 jobs are lost.

They argue the economy would need as much as 25 billion euros in financing in order to restart, as losses from the first five months will be hard to cover over the rest of the year.

An eye-watering sum for a government that Varoufakis argued this week was "commited to liberalizing its economy, reforming its pension system and running a reasonable primary budget surplus" -- it just won't accept more austerity.

Bailout three?

And therein lies the problem. Even if a deal is being drafted in the coming days, the risk is that it is only addresses unfilfulled promises of the past.

Just how much time will then be spent arguing over the conditions attached to a third bailout deal estimated at 50-80 billion euros for Greece in future?

I regularly repeat that we shouldn't underestimate the will of leaders and more specifically Angela Merkel to keep the euro zone project intact, but that doesn't mean they aren't capable of threatening the opposite.

Schaeuble with his talk of referendums and parallel currencies in Greece is a case in point. He clearly sees acceptance of a possible Grexit as an important bargaining tool.

Let's face it, Greek politics aside that ultimate threat isn't really going away until something way more radical is done to help Greece. Let's hope the reports of a long term debt deal are true.

So as tired as everyone is of fudged financing deals, at this late stage I agree with Jack Lew when talked about the brinkmanship in Europe today: "I think everyone needs to double down and treat the next deadline as if it's the last deadline and get this resolved. The risk of going from deadline to deadline only increases the risk of a Grexit."

Let's hope for all concerned June 5th is being considered that last deadline and we get a deal. If not today, well eight days counting.

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