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