Greece/EU: Waiting for the weekend

2 min read
Divyang Shah

No matter what side of the austerity or debt relief fence you sit on, it is hard to disagree with the notion that the Greek crisis has been about pitting one set of promises against another. The Greek government was elected on a platform to change the terms of the bailout, further strengthened by the recent referendum. However, there are also 18 other members of the eurozone who, when handing over bailout funds to Greece laid out some conditions.

After 4-5 months of false/soft deadlines, we have another deadline this Sunday with the debtor being asked to submit fully to the demands of the creditors. There is little optimism, with the latest Reuters poll showing Grexit risk at 55%, up from 45% last week, consistent with this being a base case for many banks. We should get a good idea of the risks when Greece delivers its new proposals, expected later today or early Friday.

The truth is that nobody knows what will happen but the risk is that a sequence of events toward a Grexit could be triggered before Sunday. We will, by Monday, know the cards that Greece and the EU were holding but it could be a very long weekend for many. If Grexit is the outcome, then the ECB defences will be tested and it is likely that we will get a frontloading of QE and if this fails, then more targeted intervention on peripheral bonds. On the FX front, it is likely that the Swiss National Bank will help support the EUR via its actions to stabilise EUR/CHF.

The price action of the eurozone bond markets continues to show that there is a strong belief that the ECB is willing to use all of its policy tools to limit contagion. It may not be a coincidence that 10yr peripheral spreads have been tightening, and likely to tighten further heading into the weekend, as the ECB uses its QE to support expectations that Grexit risks are contained.

Divyang Shah