Investors Buoyed by Latest Greek Proposals

European indices are poised to open much higher on Friday after Greece submitted its latest three-year bailout proposal which appears to have received the backing of investors as we head into another crucial weekend.

The proposals appear to offer additional concessions from Greece on the key issues that have stalled negotiations this year which could offer a platform on which a deal could be agreed this weekend. Sunday is the latest deadline for Greece as the banks are now running out of cash and without further assistance from the European Central Bank, the situation is likely to become much worse next week.

This could explain the apparent softening in stance from the Greek government as it suddenly has little choice but to comply, with the alternative scenario being extremely bleak indeed. Although, that does raise serious questions over the point of last weekend’s referendum and what was actually gained from it.

The Greeks rejected the offer that had been on the table the week before from its creditors and on the face of it, the new deal proposed by Prime Minister Alexis Tsipras doesn’t appear to be any better. Pension reform leading to 1% of savings in 2016, elimination of VAT tax breaks for islands by the end of 2016 and an apparent softening in stance on debt relief seems very odd considering their previous demands.

Whatever the reason, these latest proposals could potentially being a strong leap forward, assuming the institutions don’t find they are filled with holes, which they have on numerous occasions in the past. Another issue remains the differences in views between the International Monetary Fund and the European Union on the need for debt relief in order to ensure debt sustainability, with the latter refusing to consider it at this stage. The best we can probably hope for here is a restructuring of some kind including the offer of lower interest charges.

Given everything that has happened up until now, it’s very difficult to get too carried away at this early stage as too much can still go wrong. Among other things, Tsipras could easily struggle to get this through the Greek parliament. That’s assuming it gets the stamp of approval from Greece’s creditors who have a history of welcoming the changes while demanding more.

Whatever the outcome, it could be another very volatile day of trading as we’re going to get a lot of reaction to the latest proposal. It is also the final day of trading this week so, given what’s happened the last couple of weekends, we could see increased risk aversion as we head into the close with investors weary of the potential for large gaps when the markets reopen next week.

A lot of this will depend on the ECBs willingness to increase emergency liquidity assistance to Greek banks and enable them to continue to function even in the limited manner in which they currently are. This is unlikely in the event that talks once again fail, which could weigh heavily on investor sentiment at the start of trading next week. Once again, a massive weekend lies ahead.

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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.