- Greece needs a deal before the end of this month given government and bank liquidity crunch…
- …which increases risks, but also puts more pressure on Syriza party to make concessions
- US home builder confidence slips, but home sales expectations continue rising
Greek government scraping the barrel…
In an internal memo leaked to the press, the IMF apparently expressed concern that Greece has little chance of making its next payment to the institution and that the IMF would not be pushed into a “quick and dirty” review to disburse further bailout funds. The next payment due by Greece to the IMF is EUR 300mln on 5 June, followed by another EUR 335mln on 12 June. Indeed, it seems unlikely that Greece will be able to make these payments as it had to use its emergency account at the IMF to make last week’s payment of EUR 750mln. According to a Greek government spokesman, the government will pay public-sectors wages and pensions at the end of this month. We think the country will probably have run out of money after that. Indeed, Greece’s government has said that it needs a deal by the end of this month. The matter will be discussed at an EU Summit on Thursday and Friday.
…while bank ELA could be stretched a little longer
In the meantime, the ECB’s Governing Council meeting on 20 May (non-monetary policy agenda) will discuss Emergency Lending Assistance to Greece’s banks and the collateral used by Greek banks. So far, the central bank has raised ELA in small steps (last week by EUR 1.1bn to EUR 80bn). We expect the central bank to continue to gradually raise ELA. In any case, there has to be a two-thirds majority in the government council to stop ELA. A report by Bloomberg mentions that a person familiar with the matter said that according to the current terms ELA could be stretched to around EUR 95bn, implying there is sufficient room until a deal is struck between Greece and its creditors around the end of this month.
Negative news flow undermines peripherals
The negative news flow about the worsening liquidity crunch for Greece’s government and banks hurt not only Greece’s government bonds but was also negative for peripheral bonds. Indeed, as we get closer to the point of payment difficulties, the risks increase. On the other hand, the pressure on the Syriza party to make concessions to reach a deal is also rising. Our base case remains that Greece and the institutions will reach an agreement, although it will probably be an eleventh hour event.
US builder confidence slips, but sales expectations rising
The National Home Builder confidence (NAHB) indicator dropped two points to a level of 54 in April, but it is still at a good level (a year ago it stood at 45).The component recording sales expectations remains high at 64, while current sales conditions decreased slightly to 59. We expect stronger housing demand moving forward and residential investment to pick up moderately in the coming time.
More favourable mortgage lending conditions
The US housing market should start benefiting from improving financing conditions and increasing demand. Indeed, in the last few months, lending conditions have been improving. Indeed, the April 2015 Senior Loan Officer Opinion Survey on Bank Lending Practices, released some days ago, showed that some large banks had eased standards on construction and that more banks are reporting stronger mortgage demand across most categories of home-purchase loans.
Moderate pick up in residential investment
In the coming quarters we expect US residential investment to improve. The increasing demand for homes has resulted in lower inventories of existing home sales. As a result of these lower inventories, house prices have been increasing steadily. This should support housing construction in the coming quarters.