The uncertainty level remains elevated in what has turned into a blame game between Greece and its creditors as opposed to negotiations. Neither side wants to go down in history as having been the ones to have pulled the trigger in creating the Grexit scenario. The market is braced for the Eurogroup meeting on Thursday to end without an agreement, as a take-it-or-leave it proposal will likely be rejected by Greece.
German press reports suggest that this will pave the way for capital controls to be imposed and if Greece refuses, then threaten to suspend access to the Target2 payment mechanism. The Telegraph reports Syriza sources as saying that Greece may seek an injunction from the ECJ to stop creditors from acting in a way that breaches Greek treaty rights.
There are likely to be frantic efforts over the weekend to force Greece to deal, but from a market perspective it is already too late. The peripheral carry trade is now seeing profit taking which is not easy given the problems with illiquidity. The spread widening since Friday (June 12) highlights the extent to which the markets are worried.
For eurozone policy makers, the key is to make sure that such price action does not encourage expectations that an exit by one country from the eurozone would increase the odds of an exit by another country.
We still expect the ECB to increasingly frontload QE and, if the need arises, to take a more targeted approach to purchases as opposed to the capital weighted purchases under the current QE.
While the ECJ has said that the OMT programe is in line with EU law, the ECB would still have to drop the conditionality that a member country would need to be in a EFSF/ESM programme – a small step for a Draghi-ECB that has stood by the ‘whatever it takes’ mantra.
