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Greek Update: Little Progress in European Talks

Posted by Joseph Trevisani on Feb 16, 2015 11:54:00 AM

With American markets closed for the President’s Day holiday, Europe and Greece have center stage as the eurozone finance ministers meet in Brussels with their Greek counterparts trying to clear the impasse over the European bailout of the Mediterranean nation which expires in 12 days.

Today the news has been all bad with the ministers in Brussels for the Eurogroup meeting saying that little progress was made in  'technical  talks' over the weekend.  The ministers insist that Greece adhere to the terms of the two bailout agreements.

The newly elected Syriza government has been just as adamant that an extension of the bailout and its austerity is unacceptable. 

"The Greek government hasn’t moved at all" said German Finance Minister Wolfgang Schauble. 

The euro had been as high as 1.1429 in European trading today and 1.1444 on Friday as the ongoing weekend talks and various statements from both sides seemed to hint at a compromise.  The bottom of the almost 10 month collapse of the united currency from 1.3993 on May 8th last year was 1.1098 on January 26th.

But as statements from the participants in today's meeting became public, denying advances, the euro began to sink falling through 1.1400 just before the London close, and reaching 1.1320, the low so far about two hours later. 

Greece's bailout program terminates on February 28th and if no extension is forthcoming, the Athens government will begin to run out of funds shortly thereafter. Greek banks might also be barred from emergency ECB liquidity, essentially bankrupting the Greek financial system. 

The government of Prime Minister Alexis Tsipras was elected on a platform of ending the austerity programs forced on Greece by the rescue agreements and negotiating new less onerous terms in exchange for new funding. 

But the Greeks face stiff and so far unyielding opposition from their European lenders and the so-called Troika of the EU Commission, the IMF and the ECB.

Athens wants to end some of the structural reform requirements, such as loosening its labor market regulations and selling state enterprises and to institute changes, such as increasing the minimum wage that are forbidden by the bailout terms.  

The Greek government also wants permission to reduce its primary budget surplus, the excess funds before interest payments, to 1.5 percent from 4.5 percent. 

Greece's creditors and the 'Troika' maintain that these and other reforms are essential to return competitiveness to the Greek economy and enable self-sustaining economic growth. 

But with unemployment over 25 percent for more than two years, youth employment over 50 percent and the Greek economy a quarter smaller than it was before the crisis, the austerity prescription has run out of time with Greek voters. 

The question is simple. Where will Greece get the funds to stay solvent? The other EMU governments don’t want to lend more to Greece and they want Greece to honor the agreements already made. 

Surprisingly Greece agrees with one piece of the EMU analysis, more loans will not solve Greece's problems.  As Yannis Varoufakis has noted, Greece cannot pay back its current debt, new borrowing will not change that. 

Markets continue to believe that some compromise will be found and that Greece will not choose or be forced to exit the euro and the eurozone.   

The evidence for this conviction is straightforward-- the eur is lower but not crashing.  If a New Drachma was on the horizon, the euro would be much closer to par.

 Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

 

eur min Feb 16

 

 

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