Endgame in Greece
Greece is very much on the brink of an exit from the Eurozone as markets open this Monday morning, as decisions by the Syriza government have heightened tensions between the country and its creditors to breaking point.
Friday night’s decision to announce a referendum, due this Sunday, on the question of accepting the terms of any further bailout from the Troika meant that the Eurogroup meeting scheduled for this weekend was useless and Finance Minister Varoufakis was sent packing after failing to obtain a one month extension to the current program while the referendum is sorted out. The political ill will towards Greece must be at a high; if they have lost Merkel as an ally then the desire for Greek inclusion in the euro must be very damaged.
Euro smashed overnight
I warned specifically last week that the markets were under-pricing the risk of a Greek exit from the Eurozone and that the euro was likely to come lower as a result. Overnight the euro fell by around 2.5% as the Greek government has imposed capital controls on its banks – in a bid to prevent depositors from withdrawing cash from the banking system – and limited the impact of the European Central Bank’s decision to pause its liquidity operations to the country. Banks are closed this morning in Greece and will remain so through the week.
EUR/USD fell to 1.0955 overnight whilst GBP/EUR crashed through the 1.43 level, hitting 1.4309. Naturally, volatility in markets has picked up through the Asian session and contagion risk has increased with it. Greek debt on a ten year time frame is 3.5% higher this morning with Spanish, Italian and Portuguese bond yields also significantly higher.
Where to from here?
I have to think that any forthcoming policy response from the European Central Bank – more quantitative easing in other words – will be enough to prevent a generalised rout of Eurozone assets in the longer term. Over the coming days, however, these peripheral countries are getting tarred by the same brush.
We must now doubt that the IMF will receive a penny of the EUR1.6bn due back to it tomorrow from the Greek government with a EUR3.5bn repayment to the ECB on July 20th possibly the final nail in the Greek coffin.
The day ahead
Elsewhere, China has cut one year lending and deposit rates by 25bps over the weekend whilst also cutting the reserve requirement ratio by 50bps for commercial banks. All of this is another spin of the policy wheel to attract some stability to regional markets that have fallen dramatically in the past months amid fears of a more pernicious slowdown in the Chinese economy.
