Greece Continues Negotiations as S&P Downgrades

Negotiations between Greece and its creditors may have taken a step forward yesterday after it was reported that Germany is considering a pay-per-reform deal that would see Greece drip fed the loans as it implements its reforms. This would allow Greece to implement reforms at its own pace and more importantly, enable it to receive part of the funds this month in exchange for some already-agreed reforms and avoid default.

European stocks rallied strongly in response to the reports yesterday as they represented a significant softening in stance from Germany and the other creditors which would be very out of character. A German government spokesman later claimed that only a proposal of the three institutions will be accepted and that anything else is pure invention, which could be seen as the expected denial but I guess that doesn’t mean that all three aren’t considering it. European futures are only mildly lower this morning following yesterday’s rally which suggests this isn’t being perceived as a denial of those reports.

Even if these reports aren’t entirely accurate, it may suggest that the institutions are considering a slightly different approach to this that will allow Greece to avoid defaulting at the end of this month and continue negotiations. This is by no means the sustainable long term deal that we’d like to see but it would prevent a default for now and that’s the most important thing.

German Chancellor Angela Merkel, French President Francois Hollande and Greek Prime Minister Alexis Tsipras held talks on the side of the European Union summit again on Wednesday evening and agreed negotiations must now be intensified which shows a desire to get a deal agreed. It should be noted though that we have heard this repeatedly recently so probably suggests nothing much was actually achieved.

Ratings agency S&P clearly isn’t overly optimistic that any Greek deal will solve the country’s problems as it lowered its credit rating from CCC+ to CCC citing the delayed International Monetary Fund repayment as evidence that the country is prioritizing other spending over repaying debt. It also put Greece on a negative outlook citing the weakness in Greek banks which are effectively on life-support with the help of the European Central Bank emergency liquidity assistance (ELA) due to large withdrawals taking place on fears of a collapse. They also claimed that it is unlikely that any debt relief agreed in the coming days which I’m sure most people would agree with.

Talks will continue today with people eyeing next week as the point a deal of some kind will need to be agreed. This would enable the eurogroup to sign off the deal at next Thursday’s meeting and allow respective governments to pass proposals through parliament in time for funds to be dispersed.

The World Bank lowered its growth forecasts late on Wednesday and now sees the global economy growing by 2.8% this year from 3% in January. This comes from a cut in forecasts for both emerging and developed economies to 2%, from 2.2%, and 4.4%, from 4.8%, respectively. This hardly comes as a surprise though as the economy is facing many headwinds and growth in the first quarter was less in many countries than was expected.

The Reserve Bank of New Zealand and Bank of Korea took the number of central banks that have cut interest rates this year to 37, lowering rates to 3.25% and 1.5%, respectively. The RBNZ remains open to further easing going forward while the BoKs decision was more pre-emptive. Future decisions will depend on the economic situation but they will also keep an eye on the market reaction to any US rate hike, as and when it happens.

The European session is looking a little quiet on the data side of things. U.S. retail sales later though will be watched extremely closely for signs that consumer spending picked up last month. We’re now seeing evidence that disposable income is growing due to higher wages as well as lower oil prices which should encourage people to spend more. We also saw an increase in hiring in retail last month which would suggest they were either experiencing or expecting a rise in footfall. A strong retail sales report today would well and truly put a September rate hike back on the cards.

The FTSE is expected to open 2 points lower, the CAC 7 points lower and the DAX 6 points lower.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.