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D-Day in Athens

D-Day in Athens

29.6.2011 9:37

Today, the Greek parliament votes on the €28B five-year austerity package, MTFS, of spending cuts, tax increases and privatisations. The parliamentary session starts at 9 am CET and is expected to conclude sometime in the afternoon with a vote. Tomorrow, the parliament votes on a separate implementation law spelling out the fiscal measures in more details, potentially more difficult as the laws will cover individual privatisations, tax steps and spending cuts. In the run op to the vote, a 48-hour walk-out by public sector workers turned into violent protests and reflects that the Greek people are tired with all the austerity.

A positive outcome on the vote, which we expect, will bring at least a short term relief rally for peripheral bonds towards the July 3 Eurogroup meeting on which the EU will fiat the release of the next aid tranche and lay out the groundwork of the new Greek bailout plan (details expected July 11). The IMF gathers on July 8 to decide on its part of the financial aid. A negative vote will push Greece into default, and cause yield spreads to skyrocket. Without international help, Greece won’t be able to pay out €4B maturing treasury bills mid-July. However, rumours already indicated that in that case Europe might provide some kind of bridge loan to Greece to avoid a default from happening.

Concerning all the rumours about the PSI (rivate sector involvment) in the new Greek rescue, Fitch Riley repeated that: “based on the public description of the so-called “Vienna Plus” initiative that would entail a “voluntary rollover” of Greek bonds as they mature into bonds with similar terms, and as we have made clear in our recent public statements, Fitch would very likely view such a “scenario” as a sovereign default event and place the Greek sovereign rating into “Restricted Default” (RD).” A default rating will most likely result in a snowball reaction of rating downgrades for banks and countries and given the contagion might push Spain to the brink. On top, the ECB threatened to stop providing Greek banks with liquidity in case of default.

Today, the eco calendar contains the European Commission’s confidence indicators, Belgian CPI inflation, the US pending home sales and M4 money supply data and mortgage approvals in the UK. Germany and the US will tap the market and EU’s Van Rompuy will give a closing speech at a Conference on State of the EU.

The confidence indicators from the EU commission will be published... of course, the focus of markets today will be on Athens. However, after the recent indication on a slowdown in economic activity (inside and outside the euro zone) these figures are still worth looking at. Also keep an eye on the divergence (or convergence) between the core and the periphery. A further erosion of confidence in theory should be negative for the single currency. However, in the current environment we don’t expect the report to have a lasting impact on EUR/USD trading. The same will be true for the result of the pending home sales in the US. However, all these issues will move to the backstage as the focus of the financial community will be on Greece. There will be a flood of comments and analysis on the financial newswires today, but after all this remains a simple binary risk: yes or no. Political decision making is by definition never sure.

However, we assume that an approval of the global package today is still the most probable outcome. If not, the effect on risk assets and on the EUR/USD would be disastrous, even if policy makers would come out with some kind of plan B. In case of a positive vote, the question is how much of the defensive positioning is already scaled back after the rebound yesterday and the day before. The reaction will probably be less violent compared to a no vote, but we assume that an approval should be able to push EUR/USD in a sustainable way beyond the 1.4442 resistance. The countdown has started.

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