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The landslide victory by anti-austerity party Syriza in Greece this weekend will increase uncertainty in coming months. The coalition between Syriza and the Independent Greeks will prove a tough negotiating partner for the EU as both parties are strongly in favor of pushing the Troika to significant concessions on any future bailout terms this year.
Negotiations between Greece and its creditors collapsed over the weekend, greatly increasing the risk of a Grexit. The decision by Syriza to call a referendum on the bailout proposal next weekend, initially advocating rejection, forced the Eurogroup to abandon negotiations and focus on "damage control." Hope of a final retreat from the brink rests with the Greek parliament deciding not to hold the referendum, and accepting the proposal presented on Friday.
The decision by the ECB to remove the waiver for including Greek government bonds in standard refinancing operations changes little in the short run, as the banking system in Greece still has full access to the ELA. It does put additional pressure on Syriza, though, to abandon the position that it will exit the bailout on February the 28th, effectively pushing the economy into the abyss.
The EU and Greece finally managed to agree on the framework for a third bailout yesterday, conditional on ratification in the Greek and EU parliaments this week. Mr. Tsipras' capitulation to EU demands will increase tensions within Syriza, but we expect the opposition comfortably to offset any government dissenters in this week's vote.
The first exit poll published at 18.00 CET on Sunday evening points to a landslide victory for Syriza, and the real possibility that the party could form a majority government. Counter-intuitively, the prospects for Syriza here depend upon how the smaller parties do.
We sympathize greatly with investors' frustration over endless postponements and new "deadlines" in the negotiations between Greece and its creditors. Syriza delivered a proposal for reforms to the EU and the IMF on Monday morning, welcome d as a "positive step in the right direction" by Eurogroup president Dijsselbloem and Economic and Financial Affairs commissioner Moscovici.
Greece goes to the polls this weekend, but unlike the chaos in the summer, we doubt it will be a nail-biting experience for investors. Polls put Syriza and the conservative New Democracy neck-and-neck, but neither party likely will be able to form a majority. Syriza has ruled out a grand coalition, which potentially means tricky negotiations with minority parties. But we are confident that any new government will be committed to euro membership, and a constructive dialogue with the EU and IMF.
Discussions between Greece and its creditors drifted further into limbo last week, but we are cautiously optimistic that the Euro Summit meeting later today will yield a deal. The acrimony between Syriza and the main EU and IMF negotiators means, though, that a grand bargain is virtually impossible. We think an extension of the current bail-out until year-end is the most likely outcome.
The Eurogroup finally agreed on a four-month financing extension for Greece late Friday evening, conditional on Syriza presenting a satisfactory list of reforms later today. At the press conference, Eurogroup President Dijsselboem emphasized that commitments always come before money.
Claus Vistesen on the Greek election results impact on the Eurozone
Money supply data in the euro area are sending an increasingly upbeat signal on the economy. The increase in narrow money growth is the key variable here, now pointing to a noticeable acceleration in GDP growth later this year. Allowing for the usual lags between upturns in M1 and the economy, we should start to see this in the second and third quarter.
Rumours of Greece stepping back from the brink and accepting its creditors' demands, have taunted markets this week. But the response from the EU, so far, is that talks will not resume before this weekend's referendum. Our base case is a "yes" to the question of whether Greece should accept the proposal from the EU and IMF.
Eurozone politicians are likely scrambling for a last gasp return to negotiations before the Greek bailout program ends at the end of today. But progress will likely be limited until we have the result of the planned Greek referendum on Sunday. Voters will be asked essentially on whether they agree with the proposal presented by the institutions. The government will campaign for a "no," but a "yes" looks more likely, based on polls that Greeks want to stay in the Eurozone.
In a letter earlier this month, Greek prime minister Alexis Tsipras warned German chancellor Angela Merkel that failure to disburse additional bailout funds would lead to an imminent cash crunch. Last week's meeting with EU leaders and the ECB yielded no progress, intensifying the risk that Greece will literally run out of money within weeks.
Negotiations between Greece and its creditors will come to a head in the next few weeks as the country faces imminent risk of running out of money. Following a meeting with the head of the IMF, Christine Lagarde, on Sunday Greek finance minister Faroufakis assured investors that the country intends to make a scheduled €450M payment to the fund on Thursday.
If you were looking just at investor sentiment in the Eurozone, you would conclude that the economy is in recession.
Retail sales data later today will provide further support for the upbeat consumer story in the Eurozone. We expect a third monthly gain in a row, taking retail sales to a 0.8% expansion quarter-on-quarter in Q4, the fastest since the end of 2006. We are seeing clear signs of improvement in the Eurozone economy, and the data are forcing us to recognise upside risks to our Q4 GDP forecast of 0.3-to-0.4%
The danse macabre between Greece and its creditors continued last week, increasing the risk of default and capital controls. Greek citizens don't want to leave the euro and Germany does not want a Grexit, two positions which should eventually form the basis for an agreement.
We remain confident that a deal with Greece will be made, and that the country will stay in the euro area. But the need for both parties to avoid losing face domestically is still complicating the negotiations. Most importantly, Greece is no longer pledging an unconditional exit from the bailout program.
Another deadline has come and gone in the negotiations between Greece and its creditors. This week's meeting between EU finance ministers revealed that the creditors have not seen enough commitments unlock the €7B Greece needs to repay in July. Mr. Tsipras has agreed to energy sector privatizations, and to increase the threshold for income tax exemption.
Demands that Germany pay reparations from the Second World War, and the apparently deteriorating relationship between Messrs. Varoufakis and Schauble, have further complicated talks between the Eurogroup and Greece in recent weeks.
The construction sector in the Eurozone remains moribund. Output fell 0.4% month-to-month in September, pushing the year-over-year rate up to 1.8% from a revised 1.4% fall in August. Declines were recorded in France, Germany, and Italy, with a small increase in Spain. These data could, in theory, lead to revisions in the final Q3 Eurozone GDP data released December 8th, but we very much doubt they will move the needle. Our first chart shows the relationship between construction and GDP growth has broken down since the crisis.
Media reports that Greece and the EU are putting together "contingency plans" for a Greek default--and perhaps even an exit from the Eurozone--highlight how far the parties remain from each other.
The Eurosystem's position on Greece, echoed by Mr. Draghi earlier this week, is that progress on a deal is up to the Syriza-led government. But recent comments by German officials have added to the speculation that a Grexit is getting closer.
The Greek polls released Sunday evening indicate a comfortable victory for "no," rejecting the latest EU proposal. This is not a good outcome for the market, and volatility will likely increase substantially today. The result--not confirmed as we go to press but very clearly indicated by the count so far--gives an air of legitimacy to Syriza's brinkmanship, but the creditors' reaction to a "no" vote, which they likely did not expect, is uncertain.
Greek Finance Minister Yanis Varoufakis' letter requesting a six-month loan extension has been interpreted widely as Syriza throwing in the towel. But we don't see this way. The best possible outcome for Greece is to be able to participate in the ECB's sovereign QE program, and to negotiate a new deal with the Troika; the request for an extension could very well achieve both.
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