Greece finds itself on the brink of default and facing a possible exit from the eurozone, banking collapse and massive financial crisis. Or, just another day in the life of a country forced to endure five years of crippling austerity, high unemployment and a shrinking economy.
On Monday, the eurogroup of finance ministers will meet in Brussels and try once again to thrash out a deal that would enable Greece to receive €7.2 billion in bailout funds that were agreed as part of the extension back in February. In order to access the funds, Greece must agree on a list of reforms with its creditors, something it has thus far failed to do.
Negotiations were always going to be more difficult than in the past as the Syriza government – which only came to power in January – was voted in on a pledge to reverse the crippling austerity that had been imposed on it. This was always going to be a difficult task but the negotiations of the last few months have proven it to be much tougher than it anticipated.
The Brussels Group – which replaced the Troika and its replacement, the institutions – have met on numerous occasions in recent months and the result has always been the same. Greece offers an alternative list of reforms aimed at raising the same amount of cash as those offered by its creditors, while protecting areas such as pensions and raising the minimum wage, and they get rejected as they are either not comprehensive enough or the numbers don’t add up.
It’s got to the point that discussions between Greek Finance Minister Yanis Varoufakis and his counterparts in the eurogroup are believed to have become quite heated, most recently at the meeting in Riga on 24 April. This preceded Prime Minister Alexis Tsipras putting together an alternative negotiating team, effectively demoting Varoufakis, in an effort to get a deal done.
The problem that Greece faces is that the EU, IMF and ECB do not want to set a precedent for future negotiations with other bailed out countries. Moreover, Spain will hold a general election later this year and giving into Syriza’s demands now could drive further support for Podemos (a similar left wing party that was formed in 2014 and could realistically win the election). A repeat of these negotiations next year with members of Podemos is the last thing they will want. Instead, they will be hoping that Spain’s economic recovery continues and support for Podemos wanes, discouraged by the lack of concessions won by the Syriza party.
How have the latest round of negotiations gone?
It’s hard to tell. Comments from officials involved in the negotiations have been mixed which suggests there remains a number of issues that neither side are willing to budge on. Only today, a Greek government spokesman claimed that they “won’t go beyond the limits of our red lines. It’s clear that we cannot cut pensions.” It would appear that its creditors still expect Greece to make large concessions while making few of their own, which isn’t surprising.
Other comments have been more positive, with some officials insisting that progress is being made, although very little information is being released regarding what kind of progress they are referring to and what the remaining stumbling blocks are. This makes it difficult to determine whether a deal will actually be agreed by the time finance ministers meet on Monday.
Thomas Wieser, Head of the Eurogroup Working Group, has claimed a comprehensive agreement won’t be done by Monday, but insisted a deal will get done. This would be yet another deadline that has come and gone for Greece and its creditors, with one additional snag on this occasion. Greece must repay €763 million to the IMF on Tuesday and it’s not clear whether Greece has the funds to make this payment. They’ve already called in all public sector reserves which enabled them to make Wednesday’s €200 million repayment. No one seems to know how much they have left and when they will default.
Will anything happen over the weekend?
I would like to be more optimistic about this but I doubt it very much. These negotiations have a tendency to go right up to the wire, which would be Monday night at the earliest. If Greece can find a way to make the €763 million payment to the IMF on Tuesday without assistance, negotiations could go on even longer. We’ve seen so many deadlines pushed back that nothing would surprise me.
The problem is that the markets are very volatile at the moment and any suggestion that Greece could be allowed to default, or that negotiations have collapsed and it will default, could provoke a strong reaction in the markets.
Any downside in the euro could be exacerbated by the ECBs bond buying program that has already significantly weakened the euro and could be increased if a default had an adverse effect on eurozone growth. This potentially occurring over the weekend would also mean that markets are likely to gap when they reopen. As we’ve seen on numerous occasions throughout the eurozone debt crisis, these gaps can be quite large.
It is worth considering that Greece technically defaulted back in 2012 when its privately held debt was restructured. While this is unlikely to happen again, it does show that a Greek default doesn’t necessarily mean the country will be kicked out of the eurozone.
A much bigger problem would arise if Greek banks were cut off from the ECBs emergency liquidity assistance program. This could trigger a collapse of the banking systems and much bigger financial crisis than the country currently finds itself in. This would more than likely lead to Greece exiting the eurozone as it would be better at this stage for the country to re-issue the Drachma and rebuild its broken economy.
I find this outcome extremely unlikely though as both Greece and its creditors would suffer considerably, eurozone confidence would be shattered just as the economy was starting to show signs of recovery and there would be an element of contagion. If it did, it could have a dire impact on the markets.
How have the markets reacted to negotiations so far?
We have certainly seen a certain amount of caution being taken by investors. All you have to do it look at 2-year Greek debt to see this. Yields rose to 29.66% on 21 April as default risk grew dramatically. This has since fallen to 20.7%, which still represents a massive premium, indicating investors are far from confident that a deal will be reached.
*Taken from the Reuters Eikon platform
Other eurozone bond have also been on the rise since the middle of April but I think this is being driven by changing inflation expectations, after the eurozone escaped deflation last month. This was largely as a result of higher oil prices, which have continued to climb leading to expectations that inflation pressures remain to the upside in the eurozone.
This has led to speculation that the ECB could end its quantitative easing program before September 2016, which has offered support to bond yields and the euro.
*Taken from the Reuters Eikon platform. The thick green line represents eurozone CPI inflation data.
A certain amount of the rise in yields may be driven by Greek uncertainty but the above chart would suggest this is minimal. This may be because the contagion risk is much smaller than it was in 2010, when the crisis first erupted. At the same time, the ECB is buying €60 billion of bonds each month which will be helping to keep yields lower.
How about technical analysis?
EURUSD has seen a prolonged period of weakness and was overdue a correction of some kind and that is what we’re now seeing. The pair broke above the neckline of a double bottom on 29 April and has continued higher since. One of the benefits of the double bottom is that if offers potential price targets, based on the size of the formation. In this case, that is around 1.1570. Given that just below here we have a previous support and resistance area and the 50 fib level – 16 December highs to 13 March lows – I think we may see the pair run into resistance just ahead of this projected target.
Of course, if Greece fails to agree a deal on reforms Monday and defaults Tuesday, then these technical levels go out of the window and I imagine the euro would make a sharp move to the downside. The severity of the move to the downside would depend on the kind of default it would be. Another restructuring deal for example may be seen as more positive than a messy default as it would make Greece’s debt more sustainable and not carry contagion risk.
If a deal is reached on Monday, this could offer additional support to the euro, potentially pushing it towards 1.1750 – 1.1850 as the can is successfully kicked a little further down the road.
0 коментарі:
Post a Comment