by Solomon Teague, Euromoney
As the race to reach an agreement on Greek reforms and the latest instalment on the European aid package enters its final weeks, prime minister Alexis Tsipras looks set to make the necessary concessions to secure European assistance.
Greek deputy prime minister Yannis Dragasakis has indicated the government is close to reaching a “minimum agreement” with its creditors to avoid default, in a week that has seen the Greek government removing the remaining obstacles to a settlement. “This sounds like fighting talk from a group that has been forced to concede on this occasion,” says Craig Erlam, senior market analyst at Oanda. Time is running out for Greece to secure the final tranche of Europe’s second bailout fund and there has been a visible change of attitude on the Greek side of the negotiating table. Tsipras reshuffled his negotiating team, in effect relegating his bellicose finance minister Yanis Varoufakis to a supporting role. This was seen as a bid to draw some of the toxicity from the talks, with the intransigent Varoufakis seen as one of the principal obstacles to an agreement. Deputy foreign minister Euclid Tsakalotos – who cuts a more mollifying figure than the finance minister – is now leading the negotiating team that will try to reach a deal in the coming days. Tsipras appears to prepare the way for Syriza, the ruling party, to back down on the hard-line stance it took in the run-up to the Greek general election, by promising a referendum to ratify any agreement judged too austere. This gives him the wiggle room to back down on promises that won him the election, without being personally culpable.
However, while a referendum might give him political cover at home, it does not make the outcome of the negotiations any clearer and will inevitably cause further delays and uncertainty. It might also prove difficult to arrange, given the debt-servicing timetable. “It would also be a costly exercise and you wonder if Greece can afford to fund itself in the meantime,” says Erlam.
Nevertheless, Derek Halpenny, European head of global markets research at Bank of Tokyo Mitsubishi UFJ (BTMU), says: “With polls currently showing that about 70% of the electorate want Syriza to compromise and roughly the same percentage wanting to stay in the single currency, a referendum is unlikely to instil fear into the markets like it did in the past.” Tsipras believes a deal will be reached by May 9 that outlines the reforms Greece will pursue to secure the next €7.2 billion tranche in bailout funds. In the near term, these monies are needed to make a €768 million payment to the IMF on May 12. In fine European tradition, this would be an agreement at the 11th hour: European finance ministers are likely to approve the deal at the Eurogroup meeting on May 11. Jay Bryson, global economist at Wells Fargo, says: “Although the government probably has enough cash on hand to make a scheduled €768 million loan repayment to the International Monetary Fund in May, it likely will not be able to come up with the €1.6 billion it needs to repay the IMF in June without a fresh infusion of cash. “If not, the government of the Hellenic Republic would then be in default.”
Greece owes the other 18 members of the euro-area €300 billion collectively and the upcoming payment is just the latest instalment of a €165 billion bailout programme that has been in place since 2012. Most Greek debt is in the hands of multilateral institutions such as the European Central Bank (ECB), the European Financial Stability Facility and the IMF, with private-sector investors having reduced their exposure. However, despite the relatively encouraging developments of the past few days, Bryson says: “The probability of Greek default and potential exit from the eurozone, although less than 50%, is probably higher now than it has ever been.” While EUR/USD tracked higher in recent days on the latest developments, BTMU’s Halpenny says it is unlikely to translate into a meaningful or sustained rally in EUR/USD, with ECB quantitative easing likely to be more influential.
“Greece has only gradually become a focus in the market over the past three months, after Syriza’s election victory in January and the realization that Syriza may prove as difficult to deal with as first feared,” he says. “A break further higher in EUR/USD on a Greece resolution is likely, but a couple of big figures is all we would give EUR/USD on positive Greece news.” BNP Paribas goes further by suggesting a positive outcome in Greece will cause euro weakening.
“The EUR’s funding-currency status implies a changing reaction function to Greek headlines as real yields drive the currency,” it states. “A resolution to Greek uncertainty is likely to boost global risk appetite and weigh on the EUR.” Most agree developments in the US will be a bigger influence on EURUSD. “The most likely catalyst for a move lower to our 1.04 target will be stronger US data not eurozone stress,” states BNP. “We remain short EURUSD and expect the 1.09 to 1.10 area to continue to provide strong resistance.”