Greece to Ask for Loan Extension as Debt Talks Stall

Greece will reportedly submit a loan extension request for its current €240 billion bailout program to the eurozone’s finance ministers to avoid the program’s expiry at month’s end. The newly elected Greek government has been direct in its bold refusal of continuing to accept the austerity measures imposed on the country, and it was shocked by the measures enacted by the European Central Bank (ECB) to increase the preferential borrowing rate the Greek financial system needs to avoid a meltdown. The lower rate was extended on condition Greece honored the bailout agreement. After the tone of statements from Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, the central bank decided the lower rate is no longer applicable.

The European Union and the Greek government stand too far apart with the upcoming February 28 loan expiration fast approaching. Tsipras said Greece will honor the obligations of the bailout, but it will not conform to any imposed austerity measures. If the current bailout agreement lapses at the end of February, and no new agreement inked, Athens will have to find a way to pay state employees and contractors on its own. The deadline to request an extension of the existing loan is Friday, February 20, but if Tsipras and Varoufakis are to be believed, they will not put in that request as the austerity measures will not be implemented.

Euro Holding Steady
The EUR/USD has been caught in a tight trading range as economic fundamentals battle with market participants on the direction of the pair. The ECB finally unleashed its much-awaited quantitative easing (QE) program to muted reaction. There were two main factors for the lack of depth of the move: The decision by the Swiss National Bank to end the EUR/CHF cap, and the fact that eurozone QE was already priced in.

The Greek debt drama has introduced a new wrinkle by adding uncertainty to the value of the single currency with the possibility of a ‘Grexit’ looming. However, the probability of Greece exiting the eurozone is low as Greeks have made it clear they don’t want to leave the E.U. But in expressing their views, they offer the same paradox that their current leaders are offering to creditors: No more austerity, but don’t cut the benefits.

Despite the odds against the Eurogroup (the eurozone’s finance ministers) agreeing to Greece’s loan extension request, financial markets reacted to the news favourably for the euro. Softer economic data in the U.S. has kept the dollar from appreciating and the latest FOMC minutes gave hints to a more dovish Federal Reserve.

Political Gamesmanship in Full Swing
It’s no surprise that Tsipras’s leftist party’s popularity has grown at home for standing up to the Troika (the ECB, European Commission, and the International Monetary Fund). If national elections were held today, polls suggest the Tsipras government would claim a majority of parliament. It seems Greeks are willing to negotiate after their elected leader tried and offered “all Greece can” with a defiant tone, rather than the previous government which was seen as weak negotiators. The end result might be the same, but this being politics, it’s all about the optics.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza