Eurogroup Divided on Greek Debt Offer

Time is running out on a Greek loan extension agreement. Today marks the final stretch of talks between Greece and the Eurogroup that will end with Greece having to pay its debts in full if it can’t reach a deal either by compromise or persuasion. Greece has softened its stance since the newly elected government took office, and it has gone even further as “whatever we can” turned into “whatever it takes.”

The Greek offer is for a bridge loan of six months to extend the bailout negotiations with only 10 days remaining until the current agreement expires. It’s less if you consider that the process has to be started at least a week in advance in order for funding to be available at the start of March. All eurozone member states have claimed their goal is the same: keep Greece in the economic union. Greece is arguing that it cannot remain if the bailout terms aren’t changed. In Athens’ view, the terms are beyond the country’s ability to repay its massive debt. That matters little to the eurozone’s economic powerhouse Germany. The Germans have stated repeatedly the terms of the bailout are not negotiable.

Germany Refuses to Budge
The main reason why the German-led bloc is against the current bridge loan offer is that it considers it a Trojan horse; by agreeing to a six-month delay, Greece would have already begun to renegotiate the agreement.

Greek Finance Minister Yanis Varoufakis is putting pressure on the Eurogroup to reach a decision soon by saying, “I hope there will be an agreement today.” The Eurogroup stands divided, however. There is a chasm between the unforgiving German-led group, and those asking for more details on the offer before considering it viable or ruling against it. The other faction supports Greece and its inclusion in the eurozone. They are highlighting the disaster a Grexit would have on the currency bloc.

The EUR/USD has not priced in a full Grexit scenario by next week. The tone from most European finance ministers is amicable, and Greece is getting praise for the intent in the offer, while maintaining a hard stance on the actual terms of the original agreement. The pair has traded below the 1.13 price level as sound bites and statements hit the wires driving it higher to 1.1358. An agreement does not seem imminent, but it’s almost certain that the negotiations will continue, which in itself is positive for the future of Greece.

As pointed out earlier this week, it’s no surprise that Prime Minister Alexis Tsipras’s leftist party’s popularity has grown at home for standing up to the Troika (the European Central Bank, 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.

Germany is faced with a similar political conundrum. Greece is the current poster child for defiant negotiators, and all things considered, the cost of a Greek renegotiation would be minimal if compared to other European Union debts and future ones that could be incurred as part of the ECB’s quantitative easing program. German Finance Minister Wolfgang Schauble is playing “worse cop” to Chancellor Angela Merkel’s “bad cop” stance. Merkel has been more conciliatory in her statements, but she still expects Greece to honor the current agreement.

What to Expect Next Week
Next week will bring higher market volatility. As the debt talks continue, Greece must avoid falling off the cliff by overcoming its present challenges to secure financing before the bailout deadline at month’s end.

Meanwhile, European indicators to watch include the German Ifo business climate index which is expected to improve as the German economy is purring once again. China’s advanced purchasing managers’ index will give further insight into the state of the slowdown in that country as the People’s Bank of China has been proactive in stimulating the economy.

Central bank governors around the world are scheduled to make appearances. With a global currency war still in play, those talkfests could add to market movements as verbal intervention is on the agenda after fiscal and monetary policies have been deployed. Friday’s U.S. gross domestic product advance release is expected to be lower as doubts persist about the speed of recovery of the U.S. economy.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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