Grexit Avoided – Dollar Wins

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Market Drivers July 13, 2015

EG Agrees on a deal – no debt forgiveness, asset fund set up
Chinese Trade narrows
Nikkei 1.57% Europe 1.21%
Oil $52/bbl
Gold $1155/oz.

hope but
Europe and Asia:
CNY Trade Balance 46.5 vs. 57.0B

North America:
No Data

After a long and tortuous negotiating session the Eurogroup has finally come to an agreement on Greece that set tough new conditions of the country offered no formal steps for debt relief and instead called for a transfer of Greek assets to a fund that would act as collateral for the new loans.

The euro which initially reacted positively to the announcement quickly reversed the moves traded back to session lows before finding some support ahead of the 1.1050 level. The crux of the deal in Brussels which must now pass the Greek parliament calls for bridge financing and ultimately a set up of asset fund worth 50 Billion euros that will be used partly to recapitalize the Greek banks and partly to service the ongoing debts.

The move was highly controversial when first floated over the week-end especially because it was originally intended to be domiciled in Luxembourg which would have essentially put it outside of Greek sovereignty. Some critics called the proposal nothing more than asset stripping, but the compromise solution puts the fund within Greek territorial control offering the country a modicum of control over funds. Still this is a very unusual arrangement to have obligations of the sovereign backed by assets and is testament to the fact that not only is the Eurozone very far away from any kind of a fiscal union, but also that mistrust amongst the parties remains very high.

While the deal puts another set of draconian demands on Greece, including higher taxes on tourism – its only viable and working sector – it does create intermediate term financing and more importantly restarts the banking system with the resumption of the ELA program. It was this move that finally brought Greece to its knees as the freezing of ELA credit increases brought the whole economy to a grinding halt by destroying all payment mechanisms.

Given the dire state of their economy the Greeks will likely approve the deal and while the myriad of new provisions could ostensibly improve tax collection and eliminate layers of corruption in the country it remains to be seen if the deal today could act as a foundation for economic revival. Although the creditors have categorically refused to consider the possibility of debt forgiveness the Eurogroup did mention the prospect of debt profiling which would extend maturities and create smaller debt service obligations up front. This is the very least needed to create some measure of sustainability regarding the long term service obligations of Greek debt.

Its not at all surprising then that EUR/USD sold off on the news given the massive uncertainty that surrounds the whole saga. At very least the ECB will have to aggressively continue its QE program to simply stabilize demand after the trauma incurred over the past month, That will likely put sustained pressure on the euro in the near term.

The one clear winner from tonight’s events was the dollar. With Grexit now off the table, the Fed will not have to worry about systemic risk and may focus seriously on rate normalization with September hike possibly back on the schedule. Little wonder then that USD/JPY was up more than 1 big figure trading 123.50 by morning European dealing.

Boris Schlossberg
Managing Director

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