So, the all-important Eurogroup meeting has been and gone, and there is still no formal resolution to Greece’s problems. The latest headlines come from the EU Commission President, Dombrovskis, who confirmed that Greece’s creditors had received the proposal from Athens, interestingly, this proposal seems to go further than last night’s plan, with a cut to pensions and an increase in VAT included in the new proposed package of reforms.
Dombrovskis said that the Eurogroup gave a “cautious welcome” to these proposals, but he did sound a word of caution that the EU still believes that there are better solutions and discussions are ongoing as to whether the fiscal sums add up.
It’s all about the banks
This is about as positive a response to this crisis as we are going to get from Greece’s creditors today. It now looks likely that a final, final decision on whether to unlock the next tranche of bailout funds will need to be made at an impromptu Eurogroup finance ministers’ meeting that may take place on Thursday. Until then, the ECB continues to fund the Greek banking sector; it raised its ELA ceiling to EUR 87.8 bn, up from EUR 84.1bn last Wednesday. The ECB’s ELA funding for Greece must be nearing its ceiling and this could be getting Draghi and co. worried.
According to Bloomberg, the ECB will hold an ELA review for Greece in the next 24 hours, and Greek PM Tsipras is set to meet ECB President Mario Draghi, presumably to discuss the banking sector, in the next couple of hours. If the Draghi/ Tsipras meeting, or the ECB Greek ELA review, end badly that could be when the proverbial really hits the fan for Greece and when a bank run and capital controls become reality. It could also trigger a sharp sell-off for European markets. Thus, even though the stock markets have been on rocket fuel at the start of this week, there are still some hidden dangers.
Another bailout on its way?
Ultimately, how Greece can pay back any of this money is still in question. The funds currently up for negotiation total less than EUR 3 bn, which won’t last long. If the Greek economy doesn’t turn itself around quickly then it may need another bailout, and another bailout would likely mean even more tortuous negotiations in the coming months.
The market outlook:
The markets don’t seem to care about the future, we all know that, they only care about the present, and the “positive” news about Greece so far on Monday is the main reason why the major European bourses have closed up nearly 4% today. There are some brave investors out there who have swooped in to pick up Greek stocks even though there is no formal deal; the Athens Stock Exchange is up nearly 10% on Monday.
Interestingly, the FX market only seems marginally interested in what is going on in Greece. EURUSD has been range-bound for most of the day, but after reaching a high of 1.1410 earlier, the shine was taken off when a German lawmaker reminded the markets that Greece had to pass “prior actions” to get fresh aid. Thus, we wait to see if this will trigger a sell-off in European stock markets on Tuesday. This headline driven activity is likely to last until a final decision has been made on Greece, which should happen by the end of this week. So, in the words of Dolly Parton, “here we go again...’ Expect plenty of volatility, especially in the stock markets, and if you’re not bored of Greece yet, you soon will be.