Greece's capital controls imminent without breakthrough

Euro area heads of state have scheduled an emergency summit for 22 June in what could be the last-ditch attempt to strike a deal to avert a financial crisis for Greece. With the end-of-June IMF deadline fast approaching, Angela Merkel repeated this week that a deal was still possible, but if there's no progress next week it is likely to see immediate negative market reaction consistent with a crisis scenario.

On 17 June, the ECB's Governing Council decided to increase the ELA ceiling again by €1.1bn to €84.1bn, following a sizeable increase of €2.3bn on 10 June. Deposit outflows have accelerated again since the beginning of June, as dynamics between Greek authorities and the Institutions have worsened. 

If there is overwhelming evidence that a deal is out of reach, the quality of Greek collateral would drop and the ECB would very likely have to react by increasing haircuts as early as next week, before the end-of-month expiration of the IMF programme. In turn, this could lead to temporary bank controls, possibly of the type imposed in Cyprus in 2013.

If no progress is made before the end of the month, from July the ECB would increase the haircut sufficiently to force Greek authorities to impose capital controls in order to avoid meltdown in the Greek banking system. In such a scenario, without any additional official funding, Greece risks missing a EUR1.6bn payment to the IMF on 30 June with a knock-on effect of further missed payments, the next one being EUR4.3bn to the ECB on 20 July.

These events would precipitate a political crisis in Greece, which could lead to a referendum and/or snap elections. If a more moderate coalition emerged as a result of the crisis, maybe a Greek exit could be avoided and Institutions could be re-engaged, paving the way to a "default without EA exit" scenario.