Focus Remains on Greece as Default Risk Grows

All eyes are on Greece for any sign of a new bailout deal being reached during an emergency Eurogroup meeting on the weekend.

While many deadlines have come and gone, is has been suggested that this is Athens’ last chance if the Greek government wants to avoid defaulting on its €1.6 billion repayment it owes the International Monetary Fund (IMF). While these deadlines can quite often be taken with a pinch of salt, Greece has literally run out of time on this occasion. The IMF has explicitly rejected any request for a grace period for Greece to make the repayment, writing off any chance of negotiations being extended beyond the June 30 deadline.

Meanwhile, the European Central Bank (ECB) has stated that it will continue to offer emergency liquidity assistance (ELA) to Greek banks as long as it looks like a deal can be reached. If they fail to come to an agreement over the weekend, it’s possible Greece’s banks will not open on Monday, and the country will have to impose capital controls. That could cause widespread panic in the markets as it will be the first step toward Greece exiting the eurozone.

The fact that this could happen over the weekend is far from ideal as it exposes traders to gaps in the market when it opens next week. We could see significant risk aversion in the markets as traders reduce their exposure to the fallout of a potential breakdown in talks.

Already today European indices are around half a percentage point lower and that could rise further. The situation could mirror last week in which equity indices were holding up quite well, but sold heavily into the end of the session and ended the day lower.

Tsipras Has Little Wiggle Room

The problem with negotiations at the moment is that the IMF is refusing to compromise on pension reforms amounting to around 1% gross domestic product in savings. Greek Prime Minister Alexis Tsipras knows he cannot accept this demand because he will lose the support of his citizens. He was elected on the premise of no more austerity and a pledge to protect pensions. It’s highly unlikely he would get the full support of his own party to ratify such a deal in the Greek parliament.

It has been suggested that this may be a ploy by eurozone officials to force Tsipras to resign, and thereby necessitate new elections in Greece in the hope a more obliging government and negotiators are elected. The problem with this theory is that new elections could quite easily lead to the election of a party with an even harder line than Tsipras’s Syriza party, and one that has no fear of leaving the eurozone.

At the moment hope remains for some form of a bridging deal that allows the country to default with a commitment to reform pensions at a later date. A Greek default will be very bad for all parties concerned, while the IMF conceding on a reform that it deems as necessary would set a bad precedent.

One thing is clear: there will be turmoil in the markets when they reopen next week. If we see a Greek deal then there will be cause for celebration while no deal could create a high volatility scenario as uncertainty would be at its highest point.

Stateside Events May Be Overshadowed

With the threat of sheer financial calamity looming over Europe, there will be little focus on the U.S. today despite a few important scheduled events. However, the revised University of Michigan consumer sentiment reading may attract some attention. The index is expected to remain at 94.6 for May. Meanwhile, Federal Reserve Bank of Kansas City President Esther George who, despite not being a current member of the Federal Open Market Committee (FOMC), may be able to offer insight into the thinking at the Fed ahead of the FOMC’s September meeting when many expect a liftoff in rates to be announced.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.