Another 'Make-It-Or-Break-It' Deadline Passes

Another make it or it break it deadline passes in Greek negotiations and the markets take it in stride. Indeed, the relatively calm markets conceal the angst below the surface. After nine Eurogroup meetings since the Syriza government was elected that failed to put any closure on the issue, it is little wonder that they failed the eleventh time. Now European officials reportedly are set to give Greece a "take it or leave it" ultimatum. However, the heads of state summit today and tomorrow is key.

The idea is that some agreement is necessary so that the Greek parliament can approve it before other parliaments, including Germany early next week. And even here there seems to be some fuzziness. If there is an agreement in principle, the Eurogroup finance ministers can be instructed by their governments to free up profits from the prior SMP program that Greece can use to satisfy the IMF obligation. The next debt payment is a Samurai bond for a little more than 100 mln euros due after the first week in July.

Officials are bringing such pressure to bear on Greece that they are revealing the discretionary nature of their rules. The IMF's Lagarde, for example, has claimed that Greece will be given no grace period, but by the IMF's rules the lack of a timely payment is not a default but rather the debtor goes into "arrears" for which there is a standard operating procedure. The IMF's discretion in lending to Greece more than any other country ever based on its IMF quota is part of the problem. If the borrowers are irresponsible, what does it say of the lenders?

Many think that officials are purposely trying to force regime change in Greece. However, recall that the Troika's clash with Greece did not begin with Syriza. Indeed, Syriza's electoral victory was partly a function of the lack of progress with the previous government led by the center-right New Democracy and Samaras.

The main stumbling block at this late date appears to be the mix of spending cuts and tax increases. Syriza's proposals emphasized the latter, the creditors, especially it appears the IMF, wants more of the former. There is still good reason to believe that after so much distance has been covered, with so much at stake, not just the irrevocable nature of EMU, but the geo-strategic issues, and the risk that of driving Greece further down the road toward a failed state. As US General Powell told President Bush about the dysfunctional Iraq--"you break it, you own it."

The official creditors are setting the general narrative that the business media has tended to echo. However, in the court of world opinion, it is not so obvious that the official creditors will be seen as its narrative suggests in the morally superior position. Rather, we suspect it would be seen as the failure of leadership in Europe and IMF. Greece's credibility was not strong to begin with, but the EU, IMF, and Germany have much more to lose in this respect. Moreover, to the extent the hardline by the creditor is being touted to intimidate others (e.g. Podemos in Spain), it is failing as the recent local and regional elections illustrate.

There are a few things on the calendar that can offer a momentary distraction from the Greek saga. The US data will draw some attention. It will likely confirm what many now accept. The US economy is recovering from the near stagnation in Q1 as US consumers return to the shops. Personal spending in May is expected to rise 0.7%. It would bring the 3-month average to 0.4% from 0.1% in Q1. Some observers worry that the increase is all about prices, but the data is likely to show that real spending increased by about 0.5%, which would put the 3-month average at 0.3% up from 0.2% in Q1. That would match the average in Q3 and Q4 14. There has not been a three month period that had a higher average since October 2010.

The US also reports weekly initial jobless claims, which will likely remain below 280k. Next week, the US national employment report will be released, and the early call is for another 220k net new jobs were filled. The preliminary Markit service PMI will be reported as well.

Chinese stocks had a wild ride. The PBOC injected liquidity into the banking system directly via a CNY35 bln 7-day reverse repo. This is the first such operation in two months. This seems to be to help meet month and quarter-end regulatory requirements. The PBOC has also lifted the rule capping lending to 75% of commercial bank deposits. This is aimed at boosting lending, with small and medium banks poised to benefit most though some large banks, like the Bank of Communications (SS:601328) and the China Construction Bank (SS:601939), were reportedly bumping against the cap.

The Shanghai Composite gapped higher but failed to close the gap created by the sharply lower opening last Friday. Stocks reversed course and finished the session almost 3.6% lower. There is a wave of de-leveraging as margin use fell for the third consecutive session, according to reports. This is the longest streak of margin use decline since February.

The euro and sterling are largely trading within yesterday's ranges, with a modest downside bias. The dollar is trading near 3-day lows against the yen to find support in the JPY123.30 area, which is a retracement objective of the dollar's bounce off Monday's low. The dollar-bloc currencies are enjoying firmer profiles.