Daily Insight Greece to apply for new programme
Group Economics Macro & Financial Markets Research Nick Kounis & Georgette Boele,
+31 20 343 5616
8 July 2015 • • • •
Greece set to submit a proposal for a new 2-3 year ESM programme… …based on the letter Eurogroup to decide whether to open negotiations Big question marks about whether Greece and creditors will reach an agreement Meanwhile, deterioration in market sentiment on the back of Greece and China worries
Greece set to submit request for ESM programme
Market sentiment turned negative, led by commodities,
The Eurogroup on Greece did not go exactly as planned, but
while Bund yields dropped significantly
that has been ‘normal’ during the Greek debt crisis. The new
On Tuesday during European trading hours sentiment
Greek finance minister Tsakalotos had been expected to
deteriorated in financial markets. This was reflected by sharp
submit new proposals to the Eurogroup at the meeting, but he
drops in commodity prices, especially metals. Silver,
had no new proposals. However, the Eurogroup decided that
palladium, copper and zinc lost more than 4%; while nickel
Greece would submit a new proposal requesting a long-term
prices even lost close to 9%. In addition, government bond
(2-3 year) ESM programme by Wednesday morning. The
yields dropped substantially. German Bund yields led the
institutions would make an assessment and the Eurogroup
decline, moving 12bp lower during the day. Meanwhile, 10y
would then decide whether to re-start the negotiation process.
government bond yields for Spain and Italy also lost 11bp.
There will be a Eurogroup conference call on Wednesday and a full EU Summit on Sunday.
Moves in equities and currencies more moderate Weakness in equity markets was less; major indices lost
Rumours of one-month bridge deal
between 1-3%. Meanwhile implied equity volatility (VIX) moved
The ESM deal would take time to negotiate and that is the last
back to 17. As investor sentiment recovered afterwards and
thing Greece has. A payment is due on 20 July on government
the US equity indices turned and closed positive, it is likely that
bonds held by the ECB. In addition, the banks will run out of
Wednesday’s open will be more positive. In currency markets
liquidity by the end of the week, even with tough deposit and
movements were relatively small. However, these movements
capital controls in place. There was speculation on Tuesday
pointed in the same direction as in other financial markets.
night that European leaders were considering a one-month
Initially safe haven currencies the Japanese yen and the Swiss
bridge financing arrangement for Greece. Incredibly, this would
franc did well, while the euro weakened versus the yen, Swiss
be apparently based on the creditor proposal rejected by the
franc and US dollar. During the US session the euro recovered
Greek people in the referendum on Sunday (you could not
and safe haven currencies gave back their gains.
make it up). Though it could include the prospect of debt relief. Negative sentiment due to China and Greece Negotiations will be tough and may not succeed
There are concerns that the Chinese authorities may not be
The European meetings have started well and the atmosphere
able to halt the sell-off in Chinese equities. This seems also to
was good, despite Greece failing to provide proposals at the
be fanning worries about the Chinese economy, however
Eurogroup. For instance, the usually sceptical Finnish finance
macro data have turned and we continue to expect the
minister Alex Stubbs tweeted that he had ‘positive discussions’
authorities to take the necessary measures to hit the 7%
with the new finance minister. However, the hard part lies
growth target this year. There was also nervousness related to
ahead. Significant differences, for instance, remain on debt
the Greek debt crisis, given Greece’s failure to provide
relief. Greece wants it upfront, while the other eurozone states
proposals. However, sentiment seems set to improve given the
only want to provide it once reforms in the long-term
more constructive atmosphere seen after the European
programme are implemented. In addition, the measures and
meetings. Even if a deal for Greece proves elusive as we fear,
degree of austerity will also be no walk in the park, especially
we do not see a Greek escalation or even euro exit as being a
with the Greek economy now likely contracting sharply.
Lehman moment for markets.