- European meetings set scene for a deal for Greece this week, triggering market surge
- Scramble to meet deadline for IMF payment given parliamentary processes…
- …while bank liquidity remains an issue, with another ECB meeting scheduled for Tuesday
- Greek deal this month should limit damage to eurozone economy
New Greek proposal seen as positive step
New proposals by the Greek government, which made concessions to the demands of the eurozone and the IMF, have opened the way for a deal between the country and its creditors later this week. Eurogroup President Jeroen Dijsselbloem noted that the new proposals ‘are seen as a positive step in the process’. It was hoped earlier in the day that they could lead to a deal already at the Euro Summit. However, Mr Dijsselbloem explained that ‘given the very little time that the institutions have had to look at them, they were unable to give us a full and in-depth assessment’.
Deal likely later in the week
The Greek authorities and the institutions would now get into the specifics of the proposals, including ‘doing the calculations’ as well as agreeing on a list of ‘prior actions’ needed to be carried out to unlock funds. Apart from the details, there apparently remain some differences of substance, such as the scale of cuts to pension expenditure and the extent of VAT hikes, for instance in categories such as electricity and food. So it is certainly not a ‘done deal’ though prospects look to have brightened considerably.
Markets surge as investors price in successful outcome
Financial markets already moved to price in a high probability of a successful outcome, with peripheral spreads narrowing and equities rebounding sharply. This reflects that a deal reduces the chances of wider financial contagion to peripheral countries and eurozone banks.
Deal would reduce risks to eurozone economy
Furthermore, it also reduces the risks to the eurozone economy. There were some early indications that the financial stress and uncertainty were hurting confidence indicators. A deal this week should limit the fall-out. Although sentiment indicators could still soften in June (though consumer confidence held up well), we would expect a quick recovery. The fall in oil prices, the decline in the euro and easing bank lending conditions should see the economy strengthening as worries about Greece recede.
Race against the clock to meet IMF deadline
However, we are not out of the woods yet. A deal later this week would still leave Greece scrambling to make the deadline for its IMF payment on 30 June. The ‘prior actions’ and the deal itself still would need to through the Greek parliament. Several member states also may need to obtain parliamentary approval. After that the funds would need to be disbursed. At the same time, there are only five working days left. Presumably, the IMF could allow Greece some flexibility. Although Christine Lagarde has said there will be no grace period and Greece would immediately be in default, under normal IMF procedures there is some latitude.
Greek bank liquidity remains a major concern
Perhaps a more important issue is Greek bank liquidity. Deposit withdrawal looks to have continued at a blistering pace on Monday. We estimate that over EUR 10bn has been taken out of the banks so far this month (see chart), while another EUR 5 – 10 bn could leave given the most recent developments. The ECB continues to sanction ELA, and has another meeting on Tuesday where it will likely sanction another rise. The big question is whether the Greek government and European leaders did enough on Monday to restore confidence and stem the flow. The risk is that if deposit flight accelerates, the authorities will have no choice but to implement deposit and capital controls.