Can Greece Survive Another Week?

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Market Drivers July 7, 2015

Euro tests support at 1.0950 as EG offers no new concessions
RBA keeps rates on hold
Nikkei 1.31% Europe -0.16%
Oil $53/bbl
Gold $1166/oz.

Europe and Asia:
AUD AIG Construction 46.4 vs. 47.8
AUD RBA on hold
GBP IP -0.6% vs. 0.1%
GBP MP 0.4% vs. 0.2%

North America:
CAD Trade Balance 8:30

USD Economic Optimism 10:00

The euro came under fresh selling pressure today breaking below the key 1.1000 barrier but holding just above the 1.0950 level ahead of the first Eurogroup meeting since Greece voted NO on the referendum to accept the latest bailout proposal.

There appeared to be little room for compromise as both parties held on to their core positions with European officials adamant that any debt relief negotiations cannot take place until fiscal reforms are in place an implemented. The political position of both sides has actually hardened as the Europeans and especially the Germans are afraid that giving in to Greek demands at this point would open up a pandora’s box of debt renegotiation for other periphery economies in the region. The Greeks for their part are unlikely to accept any deal that does not address the long term structural problems of the country’s debt.

The ECB joined the fray applying further pressure to the Greeks by stating that the ELA program must not threaten monetary policy suggesting that the credit lifelines to the Greek banks could be cut off. Meanwhile the situation on the ground in Greece is becoming more precarious with each day. With payments systems essentially frozen the Greek economy could be facing food and medical shortages within a week which would turn this political stalemate into a humanitarian crisis.

Although the economic risks are evident, it is unclear if there is a political will in Europe to come to a rapid albeit temporary solution on the issue. At the very least the ECB must resume its ELA liquidity to the Greek banking system in order to unfreeze the payment mechanisms for the basic day to day transactions. That’s why the central bank remains the key player in this drama, but for now it has clearly decided to align itself with the Eurogroup and is acting as the biggest pressure point on the Greeks.

No serious analysts believes that Greece and Eurogroup could come to some structural agreement over the next few days. That’s why most observers have noted that any immediate deal will likely involve renegotiation of debt timelines rather than any outright debt relief. Such a solution would provide the Germans political cover while at the same time having the practical effects of debt relief on the Greek economy.

Ultimately the Greek debt burden will have to be written off one way or another but the immediate problem facing all parties is whether the Greek economy can avoid default over the next few weeks. Without the reestablishment of credit, its doubtful that Greece will be able to stay in the euro beyond this month with Grexit becoming a reality whether despite everyone’s efforts to avoid it.

Boris Schlossberg
Managing Director

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