What is going on? Greece’s bailout expires at the end of this month and Athens needs to secure a fresh bailout from its Eurozone lenders, or an alternative source of financing, otherwise it is at risk of bankruptcy. Ahead of the bailout deadline on 28th February, Greece and the Eurozone finance ministers, known as the Eurogroup, have held talks, but, at the time of writing, a compromise has not been achieved.
The latest development has come from Greece, after it requested an extension to its current bailout on Wednesday. We will have to see if the Eurogroup agree to this, or if Greece is left without a source of financing as we move closer to the deadline.
Why it matters for markets:
A failure to reach a deal for Greece could cause a spike in volatility for financial markets and large swings in prices, similar to what we witnessed during the SNB crisis. Markets don’t like uncertainty, and if Greece is threatened with bankruptcy, the ensuing chaos could cause sharp declines in the value of European assets, including stocks and the euro.
To help you to plan your trading strategy around this important event, our research team have come up with some potential scenarios Greece may face in the coming days:
Greece doesn’t secure a deal: The next meeting between Athens and the Eurogroup takes place on Friday 20th February. If no deal is reached then we could see volatility jump and the EUR sell off alongside European stocks. This would increase the chance that Greece’s current bailout expires on 28th Feb without a replacement waiting in the wings. It would also increase the risk of Greece defaulting on more than EUR 10 billion of debt due to be repaid in the first half of this year, which could potentially pave the way to a Grexit, and a prolonged period of volatility for financial markets.
Greece secures an extension to its bailout: This would be the most risk positive outcome in the short-term as it would ensure that Greece has funds for the coming months. We may see a rally in the euro and European stock markets on the back of an announcement. Ultimately a deal would only kick the can down the road, and we could find ourselves back in this position in the Autumn, so any upside for European assets could be short lived.
The coming days could prove critical for Greece’s position in the Eurozone. If there is no deal and a Grexit comes back onto the agenda we could see a sharp increase in volatility, with risky assets potentially coming under pressure, and investors becoming more risk averse. We would expect to know if Greece does secure an extension to its bailout before the start of next week (23rd Feb).