MARKET BRIEFING – LONDON OPEN 19.06.2015
Yesterday Eurogroup Finance Ministers met in Brussels to discuss a Greek debt crisis that has dominated the financial headlines for over six months.
The meeting that was also attended by the International Monetary Fund was an attempt to find an 11th hour solution that would avert a debt default by a member of the European Union and Eurozone.
It is feared that a default or risk of default would make the run that is currently effecting Greek Banks would lead to the European Central Bank having to withdraw Emergency Liquidity Support. Such a move would cause a systemic failure of the Greek banks and could prompt an exit of the European single currency.
In the past week alone Greeks have withdrawn some 1.5bn eur from atms. The liquidity squeeze that is currently causing the Greek banking system so much stress only magnified the importance of the task at hand during Thursdays deadline Eurogroup summit.
The Greek Finance Minister Yanis Varoufakis at the meeting insisted that his Government had delivered a complete and viable solution to its European partners and IMF.
However the President of the Eurogroup, Jeroen Dijsselbloem disagreed saying that the Greek Government needs to present a “credible” proposal and “It is still possible to find an agreement and extend the current programme before the end of the month, but the ball is clearly in the Greek court to seize that last opportunity.”
The Mediterranean nation now has a little under two weeks remaining to reach a solution with all its creditors. The deadline is June 30 when the current agreement ends and a payment that is a little over EUR 1.5 billion is due to be paid to the IMF.
IMF chief Christine Lagarde also dismissed the Greek Governments current proposals as not going far enough and at the same time urged that the dialogue continue so that an agreement is reached.
Three has been a definite shift in the discussions with a realization that the current Greek debt burden of euro 320 billion which is a huge debt 180% of GBP is unsustainable. To put Greek States debt obligations into some context the UK has a debt burden of roughly half this ratio when compared to its own GDP.
The urgent issue now is how Greece is going to find the funds to repay the IMF EUR 1.5 billion on June 30 and eur 3.5 billion on July 20 to the ECB and other central banks. Even if this payments are met the Greek Government has to find another 14 billion in repayments by the end 2015
The Greek Government has run out of money and this has been confirmed during the week by the Governor of the Bank of Greece. The only way the Greek Government will be able to able to make the pending payments in June and July is if the last tranche of some eur 7.2 billion of the current bailout programme is released. However for this to happen the Europeans want the Greek Government to implement economic changes in areas such as pensions, VAT and the budget surplus. Such a move would be against the electoral promises made by Prime Minister Alexis Tsipras and another bitter pill for the Greek public to swallow.
So we are now left with the biggest high stakes games of chicken. At stake is not only the continued membership of Greece in the Eurozone but also eur 320 billion of European tax payer’s money. The aftermath of a Grexit is difficult to comprehend but the idea that the effects would be contained ignore the potential of a market overreaction that pushes other periphery countries also to the brink of disaster.
What is more worrisome for the West is the relationship between the Greek and Russian Governments. The close cultural and historic ties between both countries could just push Greece further to the east politically.
The Tsipras Government was never elected on a platform of agreement or Grexit. Therefore it is not his decision to plan or by accident trigger a Greek exit from the Eurozone system. However with time running out a bold decision has to be made.
The logical decision would be for the Europeans offering a completion of the current bailout programme in exchange for the reforms they demand and a pledge to restructure the debt burden.
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