Would you believe that 14 weeks have already passed since the Greek bailout extension deal was agreed? That’s about 2,352 hours of twists and turns, reform talks, rumours and misinformation. No wonder most analysts and investors admit to being bored. But is that boredom breeding complacency, and can investors dare to hope that this week will bring the situation to a close?
ON THE BRINK
Any expectations of a deal were dealt an early blow this weekend, when Greek Prime Minister Alexis Tsipras accused bailout monitors of making “absurd” demands and seeking to impose “harsh punishment” on Athens.
At the G7 meeting last week, US Treasury secretary Jack Lew effectively told the negotiators to quit the brinkmanship: “Let’s treat every deadline like the last.”
So that must be Friday 5 June, when Greece must make a further €300m (£215.6m) repayment to the IMF, right? Wrong.
The IMF confirmed late last week that the Greeks could make a balloon payment of €1.6bn at the end of June rather than four individual ones. The Greeks haven’t asked to do that yet but it feels like another financial stay of execution if they need it.
That’s provided Greece’s banks can withstand the pressure. Reports on Friday suggested up to €800m was pulled out of Greek banks in less that 48 hours last week, taking deposits down to the lowest level in more than a decade.
To counter concerns, Tsipras said that deposit outflows had stabilised last week while sources close to the government announced that a deal was being drafted.
Hurrah. Except Greece’s creditors then denied a deal had been struck, saying progress was being made but that more work was needed.
The European Central Bank’s trillion-euro bond-buying programme was meant to be the balm that sooths all the fears of a “Gr-accident”, and yet equity markets in the US and Europe rallied when “the-deal-that-wasn’t” was announced.
Investors do still expect a deal to be agreed. Why? Because that’s what always happens with Greece eventually – isn’t it?
Yet some analysts aren’t so sure. Oxford Economics argued in a note last Wednesday that the outcome is more finely balanced than markets current expect. “There is a 67 per cent probability of an agreement being reached, a 55 per cent probability of the program staying sufficiently on track to avoid capital controls in the next two years, and a 48 per cent exit probability.”
An additional point jumps out. Even if we get a deal this week, it is unlikely to be a long-term solution and the talks over a third bailout deal will still loom large. And that’s ignoring the risk that the Greek government fails to implement all the measures and reforms it agrees to.
WILL TSIPRAS CAVE?
Are we underestimating the likelihood that the government of Tspiras & co will cave in these negotiations?
I frequently hear the point made that Tsipras’s popularity is dwindling. Support for his stance may have halved in recent polls, but we shouldn’t underestimate his popularity at home and the lack of appetite to accept further austerity. The opposition pro-Europe New Democracy Party has not seen any gains in the polls even as the economy dwindles.
Tsipras has plenty of reasons to drag this out.
European commissioner for economic and financial affairs Pierre Moscovici reiterated to CNBC that there is no Plan B. Maybe the European Commission doesn’t need to consider one, but investors, governments and central banks certainly do.
Last week, ECB vice president Vitor Constancio warned on CNBC of the turbulence that will ensue if a deal isn’t reached quickly.
Even if you believe a Greek default or exit can be contained and the Eurozone will survive, isn’t the greater fear here what this will mean for sentiment, risk assets and markets?
US equities are trading around record highs after a lackluster earnings season and as data on Friday confirmed US GDP contracted by 0.7 per cent in the first quarter. Second quarter data is already showing signs of recovery, but it follows Federal Reserve chair Janet Yellen saying that she’s still looking to raise rates this year in any case. We can’t rely on bad news being good news for stimulus any more.
We should also consider whether Yellen fears potential market turbulence created by the start of rate rises, or whether she is more afraid that something else – like a Grexit – blows any US recovery off course and she has not taken the opportunity to raise rates while she had it.
It isn’t just about the US. China’s Shanghai market snapped a seven-day winning streak on Thursday last week, falling 6.5 per cent. The tech-heavy Shenzhen Composite, which had more than doubled this year alone, lost 5.5 per cent – its third-biggest fall in five years. The Chinese Central Bank is providing liquidity to offset China’s growth slowdown with one hand while trying to temper enthusiasm with the other.
Japanese equities, meanwhile, are also trading at 15-year highs, despite concerns regarding the efficacy of Abenomics. Japan’s central bank governor Haruhiko Kuroda told CNBC last week that he’s not concerned about brewing bubbles.
That’s just equities – nevermind the bond markets. With all the liquidity sloshing around, you’d be forgiven for questioning investors’ ability to gauge fair value any more.
Even without Greek woes, it is enough to make any risk-taker cautious.
So while investors grapple with value, economic recovery and the calibration of extraordinary monetary policy, the question is whether Greece could trigger a more significant reassessment of current pricing.
Maybe, maybe not. But each day these negotiations drag on, that risk becomes more significant, and investors would surely be wise to expect decent volatility while we wait.