Market sentiment towards Greece remains fragile and EUR is likely to be negatively impacted as political uncertainty persists. The cash troubles for Greece are likely to remain in the coming weeks despite the previous week’s IMF payment and issuance of t-bills. Greece is expected to be hard-pressed to meet all end-of-the-month public-sector payments. Similarly, banking sector liquidity conditions have worsened, as the increased ELA usage demonstrates. The elevated uncertainty is having a number of effects: 1) it continues to drive deposit outflows, 2) it creates solvency concerns for the banks, 3) it limits tax revenues, 4) it hampers 2015 growth prospects, and 5) it increases the risk of a liquidity accident for the Treasury or banks. Overall the economists think that the probability of a Greek exit is higher now than it ever was, even if a no-default “muddle-through” remains the baseline forecast. Moreover, despite the recent market complacency, some elements of contagion have finally started to permeate into peripheral fixed income and European equity markets. “Although not our baseline, we see elevated risks of failed negotiations with the Eurogroup on 24 April which would add further complications to the negotiations saga and likely weigh on the EUR”, says BarclaysElsewhere, the German ZEW and IFO (Tuesday and Friday) and eurozone ‘flash’ PMIs (Thursday) this week may indicate continued recovery in the region, but any positive impact on the EUR is likely to negated by the Greek uncertainty and by the ECB’s ‘Odyssian’ commitment to continue QE at least until September 2016.
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