3 Numbers: Greece finally maybe, European ratings, Yellen speaks
- Greece could receive its third bailout over the weekend
- Germany and EU might get a note from credit rating agencies
- Fed’s Yellen speaks; September rate lift-off possible
By Juhani Huopainen
My bottom line is that there will be optimism that an agreement on Greece will be made. Fed Chair Janet Yellen is interpreted as being a bit dovish and we could see an anticipatory relief rally ahead of the weekend, as outlined in my squawk yesterday.
Greece close to a deal for its third bailout
The Greek government last night sent its concrete proposals for short and long-term reforms, following the country’s request of a three-year loan from the European Stability Mechanism.
There will be an emergency meeting of the euro area’s finance ministers on Saturday, followed by the heads of state meeting on Sunday. On Monday, the European Central Bank will review Greece’s eligibility for emergency liquidity assistance.
The key things to watch will be Friday afternoon's Greek parliamentary vote on a mandate for the prime minister to negotiate based on the reform plan, followed by the Eurogroup negotiations on Saturday. The Financial Times stated that if there is no deal on Saturday, the Sunday meeting will discuss and agree on Greece's exit from the monetary union. George Magnus tweeted that the decision of the creditor countries has to be unanimous, so there is a chance that the deal will blow apart.
The market reactions to the twists and turns of the Greek drama have been small, with mostly the peripheral bond yields jumping up a bit. It seems that investors sincerely believe that any damage from Grexit will be reasonably well contained, and should something happen, the European Central Bank will step in.
There are two ways how this could play out – either there will be no deal and the ECB on Monday pulls the plug on Greece, effectively forcing Greece to introduce a parallel currency, or then there will be a deal, and everything will be apparently cozy for some time.
A third and less likely option would be a sort of European-style muddle-through in miniature scale where Greece remains in "Grimbo" – a Greek limbo of capital controls, closed banks and being drip-fed emergency liquidity assistance by the European Central Bank. The hard deadline is still probably July 20, when Greek government bonds held by the ECB mature. Unless there is a payment, the ECB will be forced to end the ELA, which would push Greece immediately out of the monetary union.
The three-year plan would probably be suitable to the European politicians, as it would last long after this year’s elections in Spain and Portugal, the French presidential election in April/May 2017 and UK’s referendum on EU membership by the end of 2017. Additionally, the proposed schedule for adjusting the EU treaty in 2017 could conveniently be completed before Greece again becomes headline material.
European credit ratings
Germany’s sovereign debt credit rating is scheduled for a possible adjustment today by both Fitch and Standard & Poor’s. Both agencies currently rate Germany’s debt as AAA and the outlook as stable.
With increasing uncertainty over Greece and the losses that the country’s default would cause to Germany, it is possible that instead of just quietly sitting over the scheduled date and thus quietly confirming the stable outlook, they might publish a statement listing some of their worries. Remember, the elections in Portugal and Spain could also bring in new risks.
I don’t see the raters changing Germany’s outlook, and neither should there be any surprises from a possible warning on the amount of fiscal damage that Greece’s default would cause. The key point to understand is that should the raters begin to talk about the euro crisis, it could affect the overall opinion in Germany on the governance and future of the monetary union.
Additionally, Moody’s has a scheduled opportunity to update its Aaa-rating (outlook stable) of the European Union.
Janet Yellen speaks (16:30 GMT)
Federal Reserve Chair Janet Yellen’s speech will be closely watched, as the Fed’s last meeting’s minutes were published yesterday, but failed to provide any new clues on the timing of the first interest rate hike.
The Fed is getting close to its first rate hike since the crisis started, but the current market environment including China’s growth outlook and uncertainty over Greece was listed as a worry by “several” members. Whether the Fed feels comfortable to hike in September is still an open question.