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DB: IG: Greek Overview – FXWW Chatroom

Finally some prospect of a Greek agreement…Markets have begun the new week in “risk on” mode, driven by a sense that a hitherto elusive agreement between Greece and its creditors may suddenly be close to hand. We noted yesterday talk of a new Greek proposal to be put to creditors ahead of the day’s Eurogroup and EU leaders’ meetings. That proposal seems to go some way to bridging the gap between what Greece had previously offered and what its creditors had demanded. 

Importantly the proposal includes measures on the contentious area of pensions (including the elimination of early retirement benefits from 2016, to be phased in over three years, and an increase in a special “healthcare” charge on pensions equivalent to an across the board cut of 1% in main and 5% cut in supplementary pensions). It also includes tax measures (a broad-based increase in VAT and some increases in personal and corporate tax) and spending measures (cuts in defense spending). 

Our expert on Greece, George Saravelos, characterized this proposal as “a material change in stance for the Greek government”. After meeting Greek PM Tsipras in Brussels ahead of the Eurogroup meeting, European Commission President Jean-Claude Juncker told reporters “I’m of the opinion that we’ll achieve an agreement with Greece this week,”. 
Eurogroup Chair Jeroen Dijsselbloem told reporters that the new Greek proposal was “broad and comprehensive” and said that representatives of the creditors would begin working immediately to assess the proposal in depth with the goal of securing an agreement this week. 
There is still work to be done, however, with Dijsselbloem noting that there was still “hard work to do” over coming hours. According to Bloomberg, citing an unnamed EU official, not all the measures proposed by Greece are in line with what creditors are thinking. And if any deal is reached this week – potentially at Thursday’s next EU leaders’ summit – it will only be an agreement in principle. The mostly positive initial reaction of key European polic

IG: To Greece’s new proposal – together with news that the ECB had further extended the cap on Greek ELA financing – saw the Athens index surge 9% overnight. The broad Stoxx600 gained 2.2% although benchmark indices in each of the four euro area core nations rose over 3%. The 
S&P500 gained 0.6%, also helped by a slightly larger than expected lift in US existing home sales in May (although in broad-termed the outcome was as signaled by earlier gains in new contract signings). 
With the flight-to-quality bid coming it of the bond market both 10-year Treasury and Bund yields have increased about 10bps whereas yields in the euro area peripherals have declined sharply. Greek 10-year bond yields fell 150bps whilst 2-year bond yields fell 521bps. 
It has been a generally good session for the US dollar. 
He argues that it is likely that the Greek PM will first attempt to obtain approval from the SYRIZA party’s 200-strong Central Committee before bringing the agreement to parliament. In the event of failure at the party level, he thinks a referendum would likely be called. In the event of party approval, a vote would be likely taken to the parliamentary floor. Depending on the process adopted, such a vote may take between 2 days to a week. George notes that it will remain a major challenge for the Greek PM to successfully pass a potential agreement through the parliament with local press reporting that 10-40 SYRIZA MPs are likely to dissent (the government has an 11 MP majority), while the Independent Greeks junior coalition partner (12 
MPs) have overnight also raised the possibility of withdrawing from government. How the political process plays out largely depends on the number of MPs the current government loses. He thinks that a loss of less than thirty parliamentarians may force a change in coalition to include the two small moderate parties in parliament (PASOK and the River) jointly controlling 30 MPs.
More substantial losses requiring the support of major opposition party New Democracy would open up the possibility of broader changes to the government or a referendum. As far as the ECB reaction function is concerned, George notes that it remains unclear if there is sufficient time to disburse funding ahead of the 30 June IMF payment, raising the possibility of a non-payment event even if agreement has been reached at the political level in Brussels. It is possible that the ECB maintains financing of Greek banks through this date if the domestic political approval process is moving in the right direction, though it is unclear if the central bank would be willing to raise the t-bill ceiling for the Greek government to accommodate IMF payment. 

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