Greece and the Fed, what’s new?

Posted by Robert Levy - Border Gold

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Screen Shot 2015-06-20 at 12.46.59 PMMarkets don’t seem to be overly obsessed with developments in Greece. I, however, continue to watch with absolute astonishment as the idea of a currency that was established only 23 years ago sees the potential of fracturing so quickly. With 10 days left in the month of June, key deadlines are quickly approaching for whether Greece can finalize a deal with their creditors and secure funding. Ongoing is the threat of the stability of their financial institutions with overnight lending from the ECB routinely being increased to support the outflow of customer deposits. Still this story, which resembles somewhat of a boy who cried wolf scenario, drags on for 5 years now and counting, but finally it could potentially be nearing a new chapter.

There are legitimate concerns for financial and monetary authorities, such as the ECB and the IMF, to question their support for Greece. The continued pressure put on the European Central Bank to provide a lifeline to Greece’s battered banks is an extra stress in an already beleaguered Eurozone. However, as many involved within the debt negotiations have expressed, Greece’s presence in the Eurozone has been a political decision from the beginning, and for that reason whether they remain should be a political decision as well. That being said, finer details of any such agreed upon deal by the Greeks and their creditors must satisfy the conditions set by the economic institutions like the ECB and IMF in order to provide financial support.

At the risk of not oversimplifying the situation, two potential scenarios seem to be floated by the markets. First is the risk of default, which is paired with an exit from the monetary union (or leaving the euro), and the second is that a deal is reached and everything goes back to business as usual. The latter is what’s more likely priced into the markets with near term Greek debt still priced at less than a fifty per cent chance of default. A legitimate fear for the markets, however, is the amateur Greek government, compared to its predecessors, lacks the credibility or follow through that suggests that even though a deal may be forged, a very likely scenario to one we are in now will be revisited upon the next set of deadlines.

The probability of default, however, still seems underpriced. For starters, at no point during negotiations have the Greeks or the creditors showing any leeway to the other party. The creditors want pension reform and for the Greeks that remains their sacred cow. The question becomes whether the stubbornness of the Greeks, or their inability to concede will stall the IMF from offering any concessions whatsoever. The other point that is worth noting though goes back to the money. The country has entered into a damned if they do, damned if they don’t scenario. Deposits at Greek banks are estimated to be down by 30 per cent this year as a staggering 3 billion euros has left Greece this week alone. Long-term solvency of the Greek banks becomes yet another uncertainty, particular for the German controlled ECB who are the major source of funding for the banks.

Although the story with Greece will continue to steal headlines for months into the future, these next few weeks could see a further concentrated amount of action and volatility. Greece is and always has been a distraction for the ongoing and real problems elsewhere in Europe, but how events unfold will also set precedent for debt negotiations with nations like Spain, Portugal, and others. One would hope for a deal and for Greece to remain in the Eurozone, as any fracture to the euro currency only increases its overall level of fragility.

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