Global Daily – Greek proposal a litmus test

by: Nick Kounis , Maritza Cabezas , Arjen van Dijkhuizen

• 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 Wednesday requesting a 3-year loan facility tied to a programme. It stated that Greece is committed to carry out reforms ‘in the areas of fiscal sustainability, financial stability, and long-term economic growth’. This included tax-reform and pension-related measures. It also welcomed the opportunity to explore ‘potential measures’ to make its official sector debt burden becomes sustainable.


Today’s reform proposal will be key

The letter was made up of only a page and contained no 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 Eurogroup. This will be the real litmus test of how serious Greece is about reaching a deal. Early reactions from officials to the proposals could shape market sentiment. We think that reaching a deal will be tough and there is a big risk of failure.


ECB leaves limit on ELA for Greek banks unchanged

The ECB was said to have left the limit on ELA lending to Greek banks by the Bank of Greece unchanged at EUR 88.6bn on Wednesday. The Greek banks should just about make Monday, when it will be reviewed again.


FOMC needs more evidence of strength of economy

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 delaying the rate hike – the need to tighten more rapidly. Although the US economy should continue to improve, there is a risk that if any Greece or China related stress affects incoming US data, that the Fed could delay its rate hike which we expect in September.


Support does not halt China’s stock market correction

After having more than doubled since October 2014, Chinese equities lost more than 30% over the past weeks. In view of China’s gradual economic slowdown, a stock market correction was to be expected, but the sell-off has been overly aggressive. Authorities efforts to support the stock markets have proved in vain so far. They have for instance cut interest rates and RRRs, injected liquidity into banks, eased margin requirements, halted IPOs and suspended the trading of shares for hundreds of companies. Brokers and mutual funds also took action to support the markets.


… 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 financial liberalisation. The sell-off might also complicate the strategy to use equity issuance to reduce debt levels. All in all, although hard to estimate at this stage, the stock market crash has added further downside risks to the economic outlook.