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Euro Retreats Weighted by Pessimism on Greece

Posted by Joseph Trevisani on Jul 9, 2015 4:42:00 PM

Doubts that Greece will be able to pull off the last minute deal that has eluded it in five months of fruitless negotiations with its creditors pulled the euro lower as another 'final’ deadline approached.

The euro had rallied briefly in early European trading to 1.1125 but it turned quickly, falling to 1.1024 and trading below 1.1050 for the majority of the London session. Another short resurgence to 1.1069 in early New York action had faded by mid-morning and a long slide brought the pair to 1.0092. Profit taking on intra-day positions returned it to 1.1025, just under the prior London and New York session lows. 

By midnight tonight in Europe, Greek Prime Minister Alexis Tsipras  is to deliver the details of  yesterday’s promise to "strengthen and modernize” Greece's economy and implement reforms,  in return for a three year loan package from the European Stability Mechanism bailout fund 

Greece's creditors are demanding pension cuts and tax increases which the leftist Syriza government has resisted, insisting that austerity had imposed unacceptable hardship on the Greek people. Athens says that the Greek debt burden of 240 billion euros is unsustainable on an economy that has shrunk by 25 percent in him last five years and that some portion of it must be written off. 

German Finance Minster Wolfgang Schaeuble, a consistent opponent of debt reductions in the past, today conceded that some restructuring, or 'reprofliling' as he called it, would need to be part of any new rescue package.  

"Debt sustainability is not feasible without a haircut and I think the IMF is correct in saying that,” he said at a conference in Frankfurt.  But he also said that "There cannot be a haircut because it would infringe the system of the European Union."  He left the contradiction unexplained. 

Greece's financial system has been effectively shuttered since last Monday with banks limiting ATM withdrawals to 60 euros a day per customer to conserve dwindling cash reserves. The economy is already starting to experience shortages of medicines and other essential items as wholesalers have limited cash to pay for imported goods.  On June 30th Greece failed to make a 1.5 billing euro payment to the International Monetary Fund. 

Banks in Greece are wholly dependent on the ECB for their liquidity. After a year of steady withdrawals their deposits are so reduced that without the cash from the Emergency Liquidity Assistance program provided by the ECB operating as the traditional lender of last resort and currently frozen at 89 billion euros, the banks would have collapsed. 

The Greek proposals will be forwarded to its creditors, the ECB, the IMF and the EU Commission for analysis. Their recommendations will then be sent to Euro group, the finance ministers of the Euro zone countries for their opinion and finally the entire EMU will consider the proposals on Sunday.  

European officials have expressed doubt that Greece will make the concessions necessary to obtain a deal.

ECB president Mario Draghi had reservations that a deal could be arranged in time. ”I don't know, this time it's really difficult," he said. 

European Council President Donald Tusk, who will chair the Euro group meeting said he hoped that both Greece and its creditors would propose "realistic” solutions to the country’s debt problem. 

The endgame will be determined by the ECB whose ELA funding is essential to the Greek financial system. Its decision, though, will come ultimately from Berlin, Paris and the political leaders of the EMU.    

Within few days the Greek banks will completely run out of cash. If by then an agreement with its creditors has not secured an increase in its ELA funding from the ECB, the ATMs will begin to run dry. When that happens the government will be forced to issue some sort of script to pays its own bills, pensions and other obligations.

That will be the effective Greek exit from the euro. It would not be irreversible but since an inability to compromise brought it about in the first place, the parties would have to have a sudden change of heart to reconstitute the euroas the currency of Greece.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

eur  min july 9

 

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