As window closes, Greek activity picks up

June 3, 2015

German Chancellor Merkel and Greek Prime Minister Tsipras leave after addressing news conference in BerlinIt’s still not clear if a Greek deal will be done but the pace of activity has certainly picked up.

Athens and its creditors produced rival blueprints yesterday after the key leaders on the lenders’ side met in Berlin on Monday night – though it seems likely that each proposal will remain unacceptable to the other side.

German Chancellor Angela Merkel and French President Francois Hollande are to put their plan to Prime Minister Alexis Tsipras and he will meet European Commission President Jean-Claude Juncker this evening to try and sell his strategy.
Juncker has generally offered a more sympathetic ear but doesn’t have it in his gift to offer an easier package for Athens to swallow.

From what we can gather, the Greeks have not moved far from their red lines of no more austerity and cuts to wages and pensions. Euro zone officials have already said that if so, it will not be acceptable. Equally, the EU/IMF demands are still thought to be tough, demanding a large primary budget surplus and difficult economic reforms in return for more bailout cash.

Dutch Finance Minister Jeroen Dijsselbloem, who chairs the euro zone finance ministerial group, was unequivocal. “The bottom line is that we are not going to meet them halfway,” he said. “The package as a whole must make sense in budgetary terms.”

That is indeed the bottom line. The IMF and the euro zone can only hand over more aid if they can at least maintain the pretence that Greece’s budget numbers add up and its mountainous debt can be put on a downward path.

As ever in these situations, money talks and Greece doesn’t have any. It might be able to meet a 300 million euros repayment to the IMF on Friday but it must pay the Fund 1.6 billion over the course of this month and if no deal is struck by the end of June, the bailout programme lapses and the game is over and default must surely follow.

Tsipras has scored a mini-victory by getting the top politicians embroiled in the process, over the technocrats, but despite defiant rhetoric, it seems likely that he will have to swallow painful pension and labour reforms and put them to parliament at the risk of a revolt in his Syriza party or call a snap referendum. But nothing is certain.

The fact that any agreement must be ratified by euro zone parliaments means there is at best two weeks left to settle this.

The European Central Bank has a policy meeting having given markets a bump by announcing it would ramp up its bond-buying in the near-term in anticipation of thin summer markets.

With QE in full sway the focus will be firmly on anything Mario Draghi says about Greece following his Monday night meeting in Berlin with Angela Merkel, Francois Hollande, Jean-Claude Juncker and Christine Lagarde.

The ECB is determined that politicians make the running on Greece though it is notable that last week it did not lift the ceiling on emergency funding for Greek banks for the first time in a long time. If a cash-for-reforms deal were struck with Athens, the ECB could allow the Greek government to issue more short-term debt to stay afloat and could even hand over profits it has made on holding Greek bonds.

Another option would be to give Greece access to surplus funds – running to around 10 billion euros – which were earmarked to recapitalize Greek banks. But we’re still some way from any of that, if indeed we ever get there.

Any such moves will meet stiff opposition, particularly from the Bundesbank which is concerned that Germany typically ends up with the bill for such generosity.

On the macro front, euro zone inflation has just lifted back into positive territory – at 0.3 percent in May. The ECB is likely to lift its inflation forecasts while keeping those for growth steady.  Three months ago, it forecast growth of 1.5 percent this year and inflation at zero.

Draghi will doubtless reaffirm his commitment to pursuing QE all the way through to September 2016. A slew of service sector PMI surveys will give a snapshot of activity in Europe in May.

Poland’s central bank also meets and will be firmly on hold after it announced an end to its rate-cutting cycle in March following a larger-than-expected 50 basis point cut which took rates to an all-time low of 1.5 percent. Our polling has produced a median forecast that rates will rise in the third quarter of 2016, with the benchmark ending next year at 2.0 percent.

The Organisation for Economic Co-operation and Development publishes its twice-yearly forecasts for the world’s major economies. It also holds a conference with finance ministers from Spain, Italy and Portugal speaking, as well as the Netherlands’ Prime Minister and German Economy Minister Sigmar Gabriel. French President Francois Hollande gives a speech later.

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