As liquidity constraints in Greece become more real, a Grexit is growing more likely by the day. While a possible Greek default on its payments to the IMF (recently suggested by Greek officials) may not directly result in Grexit, such an event could be perceived as a serious event by the ECB, which holds the keys to liquidity for Greek banks.
If that liquidity tap is turned off, capital controls and an exit from the common currency back to the Greek drachma may be the only alternative. Negotiations between Greece and its creditors are ongoing, but there is little indication that either side is willing to compromise.
The Greek side is pointing to the severe implications a Grexit would have for the rest of Europe. The German finance minister, meanwhile, has highlighted the ECB’s “QE firewall” put in place to mitigate such risks, and has ruled out the release of any bailout funds at April’s Eurogroup meeting.
Danae Kyriakopoulou, senior economist at the CEBR, says No
The likelihood of a Greek debt default has certainly risen, with the IMF’s latest rejection of Greece’s plea for rescheduling another dismal note. But although a straight rejection of the Grexit scenario now carries less weight than before, it is wrong to expect that default and Grexit will necessarily coincide.
As Mario Draghi noted this week, the Greek banking sector can continue to rely on ECB support for as long as it remains solvent. And as long as banks can continue providing liquidity, Grexit can be avoided even if Greece misses a payment or defaults.
What we could see instead is a default within the Eurozone accompanied by capital controls, or a situation where there is no external default, but internally payments are carried out in a different “currency”. Only if Greek banks are deemed insolvent and the ECB pulls the liquidity plug will Grexit become unavoidable. However, at the present juncture, this scenario is not the most likely one.