Despite the optimism expressed late last week, talks between Greece and the other EU Finance Ministers broke off after only four hours today. The talks had been expected to run well into the evening, but were deemed pointless after Greece flatly rejected the EU proposal of a six-month extension to the bailout. The effect on the markets tomorrow is uncertain, and we'll be watching the Asian markets overnight for some indication as to how US equities and bond markets will react. (US markets were closed today for Washington's Birthday, known popularly as Presidents' Day.)
The next major milestone in the sage will come on Wednesday. That's when the European Central Bank (ECB) will decide whether or not to continue their emergency lending program to Greek banks. Without that program, Greek banks have less than 14-weeks of solvency remaining. They are hemorrhaging deposits at the rate of over €2 Billion ($2.27 Billion) per week. In just three months, the banks will not have the collateral needed to obtain loans from the Central Bank, although the real crunch will come in late March when Greece faces some heavy loan repayment requirements.
Part of the problem appears to be a question of semantics. Greece is willing to accept "six months of credit" however they will not accept a six-month extension of the bailout. Economics Commissioner Pierre Moscovici expressed his frustrations, saying "We need more logic and less ideology." The EU officials were dismayed last week by what they portrayed as a total lack of preparation on the part of the Greek finance ministers, and they question whether or not the young government understands the seriousness of the situation. For now, the EU feeling is that Greece is putting political concerns ahead of the dire economic needs facing the nation.
The ball appears to be in Greece's court since several ministers were quoted as saying that further talks would require Greece to request a bailout. A separate but equally contentious issue remains over the austerity programs that were tied to the original bailout. Greece is on record as proposing a halt to those austerity programs as part of any new agreement, however the EU - especially Germany, their largest creditor - wants none of that. According to German Finance Minister Wolfgang Schaeuble, Greece has "lived beyond its means" for a long time. Neither Germany nor the rest of the EU are willing to continue to provide bailout funds without proof that Greece has learned to manage its debt.
Polls in Greece appear to put some pressure on the young leftist government to reach a compromise. 68% of Greeks seek a fair compromise, while only 30% advocate standing firm against the EU. An astonishing 81% want Greece to stay on the Euro.
There is growing fear that the failure of the debt talks will lead to the imposition of strict capital controls. There's precedent for that. In 2013, Cyprus was forced to close the banks for two weeks while capital controls could be introduced. With the Greek banks closed next Monday for the first day of Lent in the Orthodox Church, there's fear that the ECB could impose such restrictions as early as next week.
For now, it's back to the game of brinkmanship. With an inverted yield curve and the yield on short-term Greek bonds now in the upper teens, time is not on Greece's side. They are facing the total collapse of their banking system in a matter of weeks, and the only bargaining chip left in their arsenal is an agreement to remain in the Eurozone. The further this goes, however, the less valuable that chip will become. With the Greek banks losing close to €300 Million per day, the prospect of terms favorable to Greece are diminishing by the hour.
Showing posts with label eurozone. Show all posts
Showing posts with label eurozone. Show all posts
Monday, February 16, 2015
Wednesday, February 11, 2015
Greek / EU Agreement in Principle - Almost, Sort of, Maybe
According to the various financial news wires, sources in Brussels have reported that Greece and the EU have reached an "agreement in principle" related to the outstanding debt issues that have dominated the news for the past month. These sources state that the details are still being worked out, but are expected to be finalized and signed on Monday following an agreement that Greece would remain under the terms of the EU bailout program.
You could hear the FX, Bond, and Equity markets all breathe a tremendous sigh of relief following that breaking news. Treasury bond yields improved, equities futures improved, and the Euro gained against the US Dollar all on the word of an unnamed source that an agreement - minus the details - had been reached.
Is the market setting itself up for disappointment and the significant drop that always follows? Quite possibly. Barring other news, there's a high likelihood that equity markets will surge, especially in Europe, and that may well flow into the morning session in the US tomorrow. The greater the surge, though, the greater the potential for a significant drop heading into the weekend or on Tuesday if an actual agreement fails to manifest.
Such a failure is very possible. Despite the optimism coming from this unnamed source, both Greece and the EU were very quick to dismiss any such agreement in principle. Other sources involved in the negotiations stated that no agreement had been reached, which, barring any details, is certainly true, however they floated the idea that the existing terms of the bailout could be extended. It's very likely that that is indeed one of the offers on the EU side of the table, and given the hard-line stance taken by Germany in recent weeks, that could be viewed as a concession. The likelihood of Greece accepting it, however, is very slim.
It's important to remember the results of the recent Greek election. There was a very clear mandate from the people in support of the Syriza platform, and the fledgeling coalition government will be under extreme political pressure not to accept terms that are in direct opposition to that platform. In fact, an unnamed representative of the Greek government was very quick to dismiss the bailout extension idea as a non-starter.
So how optimistic should we be regarding the "agreement in principle" news? Without any details surfacing, I'd be very cautious. As additional information comes out of Brussels, there's a high potential for significant volatility, at least until there is word from both sides that they have truly reached an agreement. Remember, Monday is a holiday in the US and the equities markets are closed. I will be keeping my trades very short term, and will look to close my short-term open positions before the weekend. The true deadline to settle the Greek debt issue is still two weeks away, which leaves plenty of opportunity for political brinksmanship from both sides of the bargaining table. Be sure to factor in that volatility when you line up your trades tomorrow.
You could hear the FX, Bond, and Equity markets all breathe a tremendous sigh of relief following that breaking news. Treasury bond yields improved, equities futures improved, and the Euro gained against the US Dollar all on the word of an unnamed source that an agreement - minus the details - had been reached.
Is the market setting itself up for disappointment and the significant drop that always follows? Quite possibly. Barring other news, there's a high likelihood that equity markets will surge, especially in Europe, and that may well flow into the morning session in the US tomorrow. The greater the surge, though, the greater the potential for a significant drop heading into the weekend or on Tuesday if an actual agreement fails to manifest.
Such a failure is very possible. Despite the optimism coming from this unnamed source, both Greece and the EU were very quick to dismiss any such agreement in principle. Other sources involved in the negotiations stated that no agreement had been reached, which, barring any details, is certainly true, however they floated the idea that the existing terms of the bailout could be extended. It's very likely that that is indeed one of the offers on the EU side of the table, and given the hard-line stance taken by Germany in recent weeks, that could be viewed as a concession. The likelihood of Greece accepting it, however, is very slim.
It's important to remember the results of the recent Greek election. There was a very clear mandate from the people in support of the Syriza platform, and the fledgeling coalition government will be under extreme political pressure not to accept terms that are in direct opposition to that platform. In fact, an unnamed representative of the Greek government was very quick to dismiss the bailout extension idea as a non-starter.
So how optimistic should we be regarding the "agreement in principle" news? Without any details surfacing, I'd be very cautious. As additional information comes out of Brussels, there's a high potential for significant volatility, at least until there is word from both sides that they have truly reached an agreement. Remember, Monday is a holiday in the US and the equities markets are closed. I will be keeping my trades very short term, and will look to close my short-term open positions before the weekend. The true deadline to settle the Greek debt issue is still two weeks away, which leaves plenty of opportunity for political brinksmanship from both sides of the bargaining table. Be sure to factor in that volatility when you line up your trades tomorrow.
Tuesday, February 10, 2015
Greek Market Action Impact is Slowing
Several conflicting news reports came out in the overnight hours and during the morning trading session, and both reports created some minor fluctuations in the US market. Of interest, though, is that the fluctuations truly were minor. The first report provided some hope of compromise on the Greek Debt situation, and indeed the US market was up a solid 100+ points in early trading. Reports had surfaced that Greece would get a six-month extension to pay off its debt, and that provided a bit of market optimism given the looming February 28th deadline for compliance.
Mid-way through the morning session, however, German Finance Minister Wolfgang Schaeuble threw a large barrel of ice-water on that notion, stating that any claims of an extension are false. The market reacted by pulling back all of its gains since the open, and briefly traded flat. Very briefly. Almost immediately, in fact, the market started to trend back towards its early highs.
As of this writing, however, the market is back up nearly 100 points, despite WTI Crude being down 4.25% for the morning. To all appearances, the market is now shrugging off both the Greek situation and the very volatile price of oil. What is likely is that the impact of both have already been factored into a market dealing with these issues for the last several months.
Specific to Greece, there will almost certainly be a compromise brokered at the last minute. With a GDP the size of the state of Missouri - there are 22 states with a higher GDP than Greece - there's relatively little concern that Greece alone can have a significant impact. Rather, the true concern is how Italy and Spain will respond should Greece ultimately leave the the Eurozone. Compared to Greece's $283 Billion GDP, Spain weighs in at $1.358 Trillion, and Italy tips the monetary scales at $2.071 Trillion. Their economies are significant, and there's a very real concern that, should Greece leave the Eurozone, they could soon follow.
Greek Defence Minister Panos Kammenos outlined a "Plan B" yesterday, although it's doubtful that this is truly a viable plan. According to Kammenos, if no compromise is reached, Greece would seek financial aid elsewhere. "It could the United States at best, it could be Russia, it could be China or other countries," he said. The phraseology suggests that he has not yet explored these options with the countries in question, so for the moment it's pure speculation - and possibly political rhetoric - on his part.
It's doubtful the US would jump into this mix, potentially antagonizing European allies, and Russia is in no financial position to bail out anyone. Stronger ties between Russia and Greece would be interesting politically, but it's doubtful that Russia would be willing or able to open their already strained coffers to purchase those closer ties. China is a possible financier that does have the ability to bail out Greece, but would they be willing to do that when there is so little potential gain from the deal? China is heavily dependent upon exports, primarily to Europe and the US. Greece adds little to that mix, and a Chinese bailout could be perceived as a slap to France and Germany - the two primary antagonists in the current Greek saga.
Wednesday is the day where it should get interesting. European finance ministers are meeting in Brussels tomorrow to review the situation, and Greece is expected to put new proposals on the table at that meeting.
Greek Finance Minister Yanis Varoufakis is expected to detail what's being called "10 surprise reforms" which are expected to replace many of the austerity measures that were part of the original agreement. (The new government was elected on a platform that included the elimination of the current austerity measures.) He is also expected to request a bridge program that would keep the government solvent while they work on a revised debt deal. So far, that has been rejected by Germany, but it's possible it could gain traction when all of the finance ministers meet tomorrow.
It appears that the new government is simply asking for time to assess the mandate of the latest election and reconcile that with their obligations under the current bailout agreement. It's not an unreasonable request, and it would appear that the actions in today's stock market agree that some type of compromise is highly likely. Tomorrow should prove interesting, especially if Germany continues to take a hard-line no-compromise stance. In the end, though, I do expect a solution that reworks the terms of Greece's bailout, implements the new reforms, and allows Greece to remain in the Eurozone. Anything short of that benefits neither Greece nor the Eurozone.
Mid-way through the morning session, however, German Finance Minister Wolfgang Schaeuble threw a large barrel of ice-water on that notion, stating that any claims of an extension are false. The market reacted by pulling back all of its gains since the open, and briefly traded flat. Very briefly. Almost immediately, in fact, the market started to trend back towards its early highs.
As of this writing, however, the market is back up nearly 100 points, despite WTI Crude being down 4.25% for the morning. To all appearances, the market is now shrugging off both the Greek situation and the very volatile price of oil. What is likely is that the impact of both have already been factored into a market dealing with these issues for the last several months.
Specific to Greece, there will almost certainly be a compromise brokered at the last minute. With a GDP the size of the state of Missouri - there are 22 states with a higher GDP than Greece - there's relatively little concern that Greece alone can have a significant impact. Rather, the true concern is how Italy and Spain will respond should Greece ultimately leave the the Eurozone. Compared to Greece's $283 Billion GDP, Spain weighs in at $1.358 Trillion, and Italy tips the monetary scales at $2.071 Trillion. Their economies are significant, and there's a very real concern that, should Greece leave the Eurozone, they could soon follow.
Greek Defence Minister Panos Kammenos outlined a "Plan B" yesterday, although it's doubtful that this is truly a viable plan. According to Kammenos, if no compromise is reached, Greece would seek financial aid elsewhere. "It could the United States at best, it could be Russia, it could be China or other countries," he said. The phraseology suggests that he has not yet explored these options with the countries in question, so for the moment it's pure speculation - and possibly political rhetoric - on his part.
It's doubtful the US would jump into this mix, potentially antagonizing European allies, and Russia is in no financial position to bail out anyone. Stronger ties between Russia and Greece would be interesting politically, but it's doubtful that Russia would be willing or able to open their already strained coffers to purchase those closer ties. China is a possible financier that does have the ability to bail out Greece, but would they be willing to do that when there is so little potential gain from the deal? China is heavily dependent upon exports, primarily to Europe and the US. Greece adds little to that mix, and a Chinese bailout could be perceived as a slap to France and Germany - the two primary antagonists in the current Greek saga.
Wednesday is the day where it should get interesting. European finance ministers are meeting in Brussels tomorrow to review the situation, and Greece is expected to put new proposals on the table at that meeting.
Greek Finance Minister Yanis Varoufakis is expected to detail what's being called "10 surprise reforms" which are expected to replace many of the austerity measures that were part of the original agreement. (The new government was elected on a platform that included the elimination of the current austerity measures.) He is also expected to request a bridge program that would keep the government solvent while they work on a revised debt deal. So far, that has been rejected by Germany, but it's possible it could gain traction when all of the finance ministers meet tomorrow.
It appears that the new government is simply asking for time to assess the mandate of the latest election and reconcile that with their obligations under the current bailout agreement. It's not an unreasonable request, and it would appear that the actions in today's stock market agree that some type of compromise is highly likely. Tomorrow should prove interesting, especially if Germany continues to take a hard-line no-compromise stance. In the end, though, I do expect a solution that reworks the terms of Greece's bailout, implements the new reforms, and allows Greece to remain in the Eurozone. Anything short of that benefits neither Greece nor the Eurozone.
Sunday, January 25, 2015
Greece's Leftist Syriza Just Shy of Absolute Majority
Greek elections were held today, and the leftist Syriza party emerged the clear victors, taking 149 seats in the 300 seat Parliament. Despite the solid win, they fell just short of an outright majority. Party leader Alexis Tsipras hailed his victory as an end to the "vicious cycle of austerity," although Tsipras significantly toned down the anti-austerity rhetoric as the election drew near.
Tsipras now finds himself in a precarious position, balanced between his anti-euro political base, and the reality of Greek creditors trying to fend off a default on their massive debt. Whether or not Greece remains in the Eurozone is now a matter of debate, although in recent weeks, both Tsipras and German Chancellor Merkel have insisted that Greece should remain. A Greek exit would be destabilizing at best, not only for Greece, but for the Eurozone as a whole. To be sure, Italy and Spain will be keeping a close eye on Greece's decision.
Uncertainty in Greece has left financial markets unsettled several times in the past few years, and with the shift in the balance of power today, there's definitely an element of uncertainty heading into tomorrow's open. The outcome of today's election has been heralded in the polls for several months, but the moderation of Tsipras' anti-euro public sentiments can be seen as an indication that he is transitioning away from the political rhetoric needed to win and towards the reality of what it will take to lead. That may help impose a measure of stability as we wait and see how the new government takes shape.
What also remains to be seen is how the political landscape, and not just the economic landscape, develops with Syriza in power. They have publicly supported a Greek exit from NATO, and - not surprisingly - have criticized economic sanctions against Russia. As is the case with their anti-eurozone rhetoric, however, Tsipras has backed away from the extreme anti-NATO views in recent weeks. As Bloomberg stated, "Syriza is sacrificing its more revolutionary ambitions to the overriding goal of getting better terms for Greece’s economic aid package."
It will now be interesting to watch the market dynamics. Last week, we had a huge adrenaline boost on Thursday with the ECB's announcement of Quantitative Easing measures that far surpassed expectations. The adrenaline high wore off on Friday, though, as earnings reports in the US were mostly lackluster. Now we have the Greek elections upon which to focus tomorrow. Between the Greek elections and several important economic announcements in Europe tomorrow, including the Eurogroup Meeting, three IFO announcements, and December's Retail Sales report, Monday should be an interesting - and possibly quite volatile - trading day overseas. It will be interesting to see how this spills over into the US market, heading into some key domestic releases mid-week.
Tsipras now finds himself in a precarious position, balanced between his anti-euro political base, and the reality of Greek creditors trying to fend off a default on their massive debt. Whether or not Greece remains in the Eurozone is now a matter of debate, although in recent weeks, both Tsipras and German Chancellor Merkel have insisted that Greece should remain. A Greek exit would be destabilizing at best, not only for Greece, but for the Eurozone as a whole. To be sure, Italy and Spain will be keeping a close eye on Greece's decision.
Uncertainty in Greece has left financial markets unsettled several times in the past few years, and with the shift in the balance of power today, there's definitely an element of uncertainty heading into tomorrow's open. The outcome of today's election has been heralded in the polls for several months, but the moderation of Tsipras' anti-euro public sentiments can be seen as an indication that he is transitioning away from the political rhetoric needed to win and towards the reality of what it will take to lead. That may help impose a measure of stability as we wait and see how the new government takes shape.
What also remains to be seen is how the political landscape, and not just the economic landscape, develops with Syriza in power. They have publicly supported a Greek exit from NATO, and - not surprisingly - have criticized economic sanctions against Russia. As is the case with their anti-eurozone rhetoric, however, Tsipras has backed away from the extreme anti-NATO views in recent weeks. As Bloomberg stated, "Syriza is sacrificing its more revolutionary ambitions to the overriding goal of getting better terms for Greece’s economic aid package."
It will now be interesting to watch the market dynamics. Last week, we had a huge adrenaline boost on Thursday with the ECB's announcement of Quantitative Easing measures that far surpassed expectations. The adrenaline high wore off on Friday, though, as earnings reports in the US were mostly lackluster. Now we have the Greek elections upon which to focus tomorrow. Between the Greek elections and several important economic announcements in Europe tomorrow, including the Eurogroup Meeting, three IFO announcements, and December's Retail Sales report, Monday should be an interesting - and possibly quite volatile - trading day overseas. It will be interesting to see how this spills over into the US market, heading into some key domestic releases mid-week.
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