Daily Insight Greek proposal a litmus test
Group Economics Macro & Financial Markets Research Nick Kounis, Maritza Cabezas & Arjen van
Dijkhuizen, +31 20 343 5616
9 July 2015
Greece submitted a letter on Wednesday, but today’s reform proposal will be the litmus test FOMC needs more signs of stronger economy, but points to risks associated with a delay of rate hike Sharp stock market correction, despite large-scale support, adds downside risks to Chinese economy
Greek letter asks for ESM programme The Greek government sent a letter to the ESM on
Greece crisis calendar Key events coming up
Wednesday requesting a 3-year loan facility tied to a
09-Jul
Greece submits reform proposal
programme. It stated that Greece is committed to carry out
09-Jul
Eurogroup conference call
reforms ‘in the areas of fiscal sustainability, financial stability,
10-Jul
T-bills mature, EUR 2bn
and long-term economic growth’. This included tax-reform and
11-Jul
Eurogroup meeting
pension-related measures. It also welcomed the opportunity to
12-Jul
EU Summit
explore ‘potential measures’ to make its official sector debt
13-Jul
IMF payment due, EUR 450m
burden becomes sustainable.
14-Jul
Samurai bond matures, JPY 11.67bn
16-Jul
ECB Governing Council meets
Today’s reform proposal will be key
17-Jul
Coupon and T-bills, EUR 1.071bn
The letter was made up of only a page and contained no
20-Jul
ECB-held government bonds, EUR 3.5bn
details on reforms. Greece will present detailed proposals for a ‘comprehensive and specific reform agenda’ today for assessment by the institutions to be presented to the
Source: ABN AMRO Group Economics, Bloomberg
Eurogroup. This will be the real litmus test of how serious Greece is about reaching a deal. Early reactions from officials
Support does not halt China’s stock market correction
to the proposals could shape market sentiment. We think that
After having more than doubled since October 2014, Chinese
reaching a deal will be tough and there is a big risk of failure.
equities lost more than 30% over the past weeks. In view of China’s gradual economic slowdown, a stock market correction
ECB leaves limit on ELA for Greek banks unchanged
was to be expected, but the sell-off has been overly
The ECB was said to have left the limit on ELA lending to
aggressive. Authorities efforts to support the stock markets
Greek banks by the Bank of Greece unchanged at EUR
have proved in vain so far. They have for instance cut interest
88.6bn on Wednesday. The Greek banks should just about
rates and RRRs, injected liquidity into banks, eased margin
make Monday, when it will be reviewed again.
requirements, halted IPOs and suspended the trading of shares for hundreds of companies. Brokers and mutual funds
FOMC needs more evidence of strength of economy
also took action to support the markets.
The Minutes of the June 16-17 FOMC meeting showed that members were divided on the views of the US economy. Some were concerned about the weak economic momentum and the apparent weakness in productivity, while others viewed the strength of the labour market in recent months as potentially signalling a stronger than expected bounce back in economic activity. At the same, some members pointed to the risk of
… adding to downside risks for the economy Contagion to the real economy could particularly work through confidence effects. Wealth effects might still play a limited role, as overall equity holdings are still relatively moderate in GDP terms (and China’s stock markets are still one of the best performing year-to-date). Its large-scale interventions lead to the question how serious the government is with regard to
delaying the rate hike – the need to tighten more rapidly.
financial liberalisation. The sell-off might also complicate the
Although the US economy should continue to improve, there is
strategy to use equity issuance to reduce debt levels. All in all,
a risk that if any Greece or China related stress affects
although hard to estimate at this stage, the stock market crash
incoming US data, that the Fed could delay its rate hike which
has added further downside risks to the economic outlook.
we expect in September.