Greece is Still Slightly in Europe

IMF has refused to grant Greece a delay in the regular debt repayment
So it happened - IMF has refused to grant Greece a delay in the regular debt repayment. There comes a moment that everybody anticipated. Greece's rating was lowered, banks received secret orders to get rid of Greek assets, reduce the volume of loans and deposits. Greece has run out of money. It has no money to pay IMF in May, and nor it has money to pay salaries to its public sector workers, pensions/benefits. If the government does not have control over capital turnover, ECB may abandon ELA, and a drastic flight of deposits from Greek banks will begin. As much as Greece prepares for the worst - it will not avoid a liquidity crisis. However, there is one simple way out - loan certificates: regular promissory notes instead of currency to exchange for goods and services. Yes, they will never be redeemed at their face value, but a secondary market will be arranged, which, although with losses, will exchange promissory notes for euros. Here are two currencies for you. However, it is especially unprofitable for Europe - it does not want to have debt repayment with simple papers.

Today, Greece is trying to implement the Dutch model for solving the problem. The government attempts to persuade public offices to purchase short-term (to 15 days) Greek securities voluntarily. Judging by the information as of this morning - they have not reached any agreement. Ministry of Finance submitted a bill with regard to forced storage of such funds on bank deposits for their use by the government for repayment of obligations. Time is needed for such a program, and Greece does not have it. Attempts to borrow money from Russia as a prepayment for transit of gas via the Turkish Stream may bring 3-5 bln dollars - that decision is possible on April 21, then Greece will have time for negotiations. The country needs a compromise with ECB very much, it may provide at least some financing right now. None of those variants is suitable for Greece, and the chances for a positive outcome are quickly disappearing.

Last week, the yield of papers that belong to peripheral countries went through some reevaluation. More concerns appear with regard to the future of the Mediterranean countries if Greece leaves the Eurozone. In fact, nothing will happen. It will not reflect on their problems in any way; however, the path similar to that of Greece will be inaccessible for them. G7's unspoken rules demand that any currency rate must be substantiated with surplus (deficit) of intermarket trade balance - then today, EUR/USD rate must be much above parity. It is necessary to stabilize euro at least at current levels, otherwise, in case of FRS rates growth and retention of current yield of state treasury bills, all the capital that ECB is actively pouring into Eurozone banks will go to the USA.

Presently, rally in the Eurozone economy is weak, consumer inflation is on the same level, even Germany showed a decline by 1.7%. German 10-year bond yield fell to the new minimum (- 0.071%). Draghi's speech conveys the impression that he had to say more than he had planned to. That is his optimism that specifically causes fears, and that is what discourages especially:

  • Positive in economy and reduction of downward risks were tied up to advances in monetary policy and prices for energy resources;
  • Draghi tactfully refused from making an intermediate summary of QE program operation, offering to wait for its completion;
  • The issue of Greece leaving the Eurozone was not discussed, ELA aid will be provided until banks are able to provide a pledge and comply with ECB rules.

The issue with regard to possible lack of state treasury bills under further decline of profitability caused traditional attempts to persuade the market of the program flexibility and possibilities and has triggered a nervous response of euro sell-offs. The situation when after rate decrease to (- 0.10%) there were weak requests for technical adjustment, which subsequently produced another decrease is still fresh in memory. However, after a firm "no" to the possible current change of rates, the rate has won back. Over the weekend, Mario Draghi tried to persuade investors that it is not worthwhile to open short positions in euro. The market did not respond. EUR/USD closed Monday with a decrease, thus having interrupted, a four-day rally. Tuesday morning keeps the negative attitude. Target levels upward to 1.0750/1.0820/1.0900 look illusive now. The closest’s goals downward 1.0610/1.0570/1.0550 look much more promising. However, if Greece does not find new money and does not make an agreement with Eurogroup until April 24, euro will renew its annual minimums.

作者: Navsher Bartash,
ForexChief Currency strategist