Trust Standing Between Greece and its Bailout

European futures are pointing to a slightly higher open at the start of the week as Eurozone leaders close in on a bailout agreement for Greece, but a couple of issues still remain which could see negotiations continue into the morning following through the night talks.

In typical euro area fashion, talks have been ongoing all weekend and have continued through the night on Sunday with eurozone leaders desperately trying to come to an agreement. While it’s nice to finally see a sense of urgency from these officials, you have to question whether any of them will currently be in the best frame of mind to make such hugely important decisions, but as we’ve seen in the past, this is how they like to do things.

The final sticking points appear to focus around the involvement of the International Monetary Fund in a third bailout and a privatisation fund being insisted on by creditors. In a way, Greece’s rejection of the IMF in a bailout is a little bizarre as they are one of the few supporting Greek calls for debt relief, although at the same time they are also insisting on very tough austerity measures.

The biggest issue is one of trust and that is something we have been hearing a lot of this weekend. Creditors do not trust the current Greek regime to implement and stick by the reforms it is proposing, which given its actions over its first six months in power – reversing austerity measures, constantly lambasting the creditors, campaigning against the bailout extension offer in the referendum – is hardly surprising.

As a result, the creditors are looking for certain guarantees. For example, they’re pushing for a privatisation fund to be set up that will hold around €50 billion of Greek assets for an external party to sell, thereby taking any responsibility away from Greece and removing the possibility for them to change their mind.

They are also insisting on certain pension, VAT and other reforms being passed through parliament by Wednesday for a deal to be completed. There is also talk of laws being passed to commit to further measures, should the economy slow more than expected and Greece begin to fall short on its targets. Basically, the ability for the Syriza party to run the country as it wishes is being taken away from it. It’s hands are being tied and this time, they are being given no room to manoeuvre.

Investors appear fairly optimistic though that a deal, at least in principal, will be reached which explains the higher open being anticipated in Europe. With Greek banks on the verge of collapse, the country really has run out of time on this occasion and Tsipras has been left with little leverage. The last six months has been very costly for the economy and if this continues for even a week or two, the costs could be enormous. This explains the sudden concessions from Tsipras and unfortunately for him, the terms he will have to agree to are likely to be harsher than those rejected in recent months and certainly those rejected in last weeks referendum.

Tsipras is now in discussions with German Chancellor Angela Merkel, French President Francois Hollande and European Council President Donald Tusk to try and finalise a deal which could be announced this morning. If it does, it will finally bring an end to months of painful negotiations and uncertainty, although any deal would have to be passed through each parliament for approval, leaving one final potential banana skin.

For a look at all of today’s economic events, check out our economic calendar.

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.