FXStreet (Barcelona) – he Brown Brothers Harriman note that renewed optimism over a Greece deal is sending Greek bonds and stocks higher and overshadowing the ECB Meeting ahead.
Key Quotes
“Over the last several months, Greece has made several proposals to break the deadlock. The rigor, completeness, and commitment may be questioned. The key point is that they were all summarily rejected. Given that the previous conditions did not work and the results of the Greek elections, the official creditors did not offer a mid-course correction to the strategy that they had foisted on Greece…until today. And even now, it has not come from the Eurogroup of finance minister, but from the IMF, ECB, and, it appears, Merkel. Ironically the Greek government was repeatedly referred to the Eurogroup and was criticized for it end-run attempts.”
“The vast majority of the money Greece needs is not to pay for government expenditures, but to service its debt, which is largely in official hands. In effect, the creditors have said, “Do what we say, or you won’t be able to service your debt to us.” The precise details of the demands are not clear, but some elements have apparently been leaked – though we note Greece has been criticized by other countries for taking its case to the media (not that it found much sympathy there).”
“Greece is to run a large primary budget surplus (~3.5% of GDP) over the medium-term and must keep the pension fund out of deficit. It appears that in exchange, Greece would be able to re-purpose almost 11 bln euros of unused funds that were to help recapitalize the banks. Those funds could be used to pay the ECB the 6.7 bln euros due next month (in two payments).”
“Greek bonds and stocks are rallying in anticipation of a favorable outcome, but it will not be so easy. Greece’s will reportedly make a counter-offer. The more onerous the creditors’ demands, the more attractive a default/restructuring becomes. Greece and Cyprus have restructured their debt within EMU, which creates precedent to some degree, and, as is well appreciated now, there is no formal mechanism to eject Greece, or any member, from the monetary union.”
“Questions about Greece will no doubt be featured at the ECB’s press conference today. Draghi will likely recognize that economic data is improving in the euro area–not only in terms of aggregate growth, but also lending and prices. However, as he indicated before, talk of an early exit from QE is premature. This is only the third month in operation.”
“Draghi will also likely be questioned about what appears to be the lack of liquidity (different than volume) in German bunds and the spike in volatility. He will likely be asked to the ECB’s intent to expedite its sovereign bond purchases before the slowing of government issuance and thinner markets over the summer months.”
(Market News Provided by FXstreet)