What’s the Final Act in Greece's Debt Drama?

What’s the Final Act in Greece's Debt Drama?

The debt crisis in Greece is finally nearing its climax. It has taken years, a few elections and a couple of close calls, but we're finally nearing an end.

Officials at the European Central Bank increased their emergency funding to Greek banks after concerns that those banks may not be able to open on Monday as anxious depositors pulled out billions of euros. Negotiations have broken down as Athens seeks a way to repay $1.8 billion to the International Monetary Fund by the end of the month without committing to more draconian austerity measures. An emergency summit of 19 eurozone leaders is scheduled for Monday, and Greek Prime Minister Alexis Tsipras reportedly called that “a positive development on the road toward a deal.” The European Central Bank will consider more assistance liquidity for Greek banks on Monday as well.

Related: Greece Will Try to Bring More to the Table in Debt Talks

But the road is growing short. "I think we're at a moment now where the burden is on Greece to come back with a response that's the basis for reaching an agreement as quickly as possible," Treasury Secretary Jack Lew said in an interview set to air Sunday on CNN's Fareed Zakaria GPS.

While the withdrawals from the Greek financial system haven’t amounted to a full-blown run on the banks, desperation may be setting in. The Athens Exchange lost 11.3 percent last week, its fourth consecutive weekly loss. Greece's economy is in shambles: The unemployment rate is 26 percent, the youth unemployment rate is nearly 50 percent, deflation has been in play since 2013 (increasing real debt costs) and the country has fallen back into recession, with GDP contracting for two consecutive quarters.

Athens must make a decision soon; its cash reserves are dwindling. Tax payments collapsed in May as taxpayers delayed filing returns. Alberto Gallo, head of macro credit research at RBS, estimates Greek banks can last another two weeks. But before then, the Greek government faces total payments of nearly $5 billion, including the IMF payments, wages and pensions. Despite frantic efforts to transfer cash from local governments, it looks like Athens simply doesn't have enough euros to do this.

Gallo notes that Greek tax revenue in May totaled $3.2 billion, about $1 billion less than the official Ministry of Finance estimate. The underpayment has worsened in June, with only 1.5 million tax forms submitted and 4.5 million left to file over the next 11 days.

At this point, a default to the IMF looks unavoidable.

Related: What Happens Next if Greece Defaults on IMF?

Any new deal — which seems far off anyway — would need to pass national parliaments, including Germany's, before being implemented. Moreover, the IMF has said it would not offer a grace period or allow a delay in payment. But layers of bureaucracy mean it could take a few months before the missed payment becomes a legal default. Credit rating agencies have also said they would not consider a missed IMF payment as a default on privately held bonds.

Financial markets could view non-payment differently, however. A global risk-off contagion would strengthen the negotiating position of Greek leaders, which is what they seem to be betting on. The establishment seems to be pressuring Athens to come to a compromise via the risk of a destabilizing run on Greek banks and the fact that they will soon be unable to pay workers and pensioners.

Even these last two issues could be massaged via capital controls and trimmed payments.

Related: Markets Fear the End Game for Greece

If so, the next hard deadline becomes the July 20 payment to the ECB. If missed, it would be politically difficult for the central bank to continue supporting Greece's financial institutions.

The point is that while we've entered what looks to be the final act of this fiasco, it could be a long ending to a story that just doesn't want to die. Gallo sees a rising chance of a missed payment, capital controls and one last election — a referendum on euro membership, perhaps — between now and the end of July.

He recommends investors look for some widening of credit spreads and rising fear over the medium-term before a last minute deal keeps Greece within the euro area.

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