All eyes are on Greece again today and whether there will be any sign of a deal being reached during tomorrow emergency eurogroup meeting.
While many deadlines have come and gone, is has been suggested that this is the last chance to reach a deal if Greece wants to avoid defaulting on its €1.6 billion repayment to the International Monetary Fund on Tuesday. 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 offer of a grace period for Greece to make the repayment writing off any chance of negotiations going beyond Tuesday without the country defaulting first.
Meanwhile, the European Central Bank 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, we could find ourselves in a position come Monday in which the banks do not open and the country prepares capital controls. That could cause widespread panic in the markets as this is seen as the first step towards 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. With this in mind, we could see significant risk aversion in the markets today, with traders reducing exposure to the fallout of a breakdown in talks. Already today we’re seeing European indices around half a percentage point lower and that could rise further as we approach the end of the session. We could actually see something similar to last week wherein equity indices were holding up quite well but sold heavily into the end of the session and ended the day lower.
The problem with negotiations at the moment is that the IMF is refusing to compromise on pension reforms amounting to around 1% GDP in savings. Alexis Tsipras knows he cannot accept it because aside from losing the support of the voters that voted for him on the premise of no more austerity and a pledge to protect pensions, he would never get the support of his party to pass it through parliament.
It has been suggested that this may be a ploy from the institutions to force the resignation of Tsipras and new elections in the hope they get a more obliging set of negotiators. This was partnered by rumours that Tsipras would resign if he does not get the deal he wants. 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 Syriza and without fear of leaving the eurozone. It would be a very risky tactic if true.
At the moment the best we can probably hope for is some form of bridging deal at this stage 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 for something it believes will not benefit the economy would set a bad precedent.
One thing seems clear and that is that we could see some 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 panic.
There will be little focus on the U.S. itself today. The revised UoM consumer sentiment reading may attract some attention, but not much. It is expected to remain at 94.6 for May. We’ll also hear from Federal Reserve member Esther George who, despite not being a current member of the FOMC, may be able to offer insight into the thinking at the Fed ahead of the September meeting when many people expect a lift-off in rates.