Sunday, 22 July 2018

What happens once a proposal is accepted?

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Shah: Extension of the existing Greek bailout shifts attention to a third bailout.

The assumption of a deal is a brave one but given the shortage of time until Tuesday next week – IMF payments due, deposit outflows and current bailout expires – the market seems correct in pricing in a strong chance of an agreement.

But assuming that everything goes smoothly at the Eurogroup meeting today and the Summit on Thursday, this will see the baton passed on to the Greek and German parliaments for approval.

The FT reports that the approval process for Greece could take place over the weekend and only after this is complete will the German parliament be presented with an extension of the Greek bailout programme. A vote by the German parliament could be either on June 28 or 29.

Two points seem to stand out as potential obstacles to a deal:

1) IMF concerns that the Greek proposal is relies too heavily on tax hikes and not enough on spending cuts, and

2) the lack of any focus on debt relief. These are issues that are likely to need attention before the parliamentary approval processes start and will be a focus for today and Thursday.

Given that June 30 is just around the corner, the IMF is indicating some flexibility if the payment due at the end of the month is delayed by a few days (or 1-2 weeks later). If a deal looks very likely, then the ECB could also play its role by lifting the cap on T-bills that can be issued by the Greek government but this is something that the ECB is unwilling to do at this stage.

There are clearly plenty of moving parts and we should expect a lot of volatility going into quarter end which is also half year-end. An extension of the existing bailout for Greece will shift the attention to a third bailout and the issue of debt relief will likely be firmly on the table.

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