Greece and Eurozone creditors reach debt agreement
13/Jul/2015 • Currency Updates•
After seventeen hours of negotiations on Sunday that ran deep through the night and into this morning, the Greek government finally reached an agreement over a third bailout with its Eurozone creditors. Eurozone leaders had been locked in negotiations in Brussels, and ultimately reached a last minute agreement on the country’s debt deal, which critically means there will be no Greek exit from the Eurozone.
Details so far are hazy, but a few important points have emerged this morning. Crucially, creditors have demanded that Greece implements a number of key aspects of the deal into laws within the next few days. It also appears that the controversial fund with public Greek assets will be used to recapitalise Greek banks. Moreover, we also expect the Emergency Liquidity Assistance (ELA) to Greek banks to be increased as soon as the Greek Parliament passes measures in order to enable them to open. However, with an agreement there should be little need for additional draws, in fact deposits may come back to Greek banks. This, in other words, means continued support for Greece from the European Union.
Earlier on Sunday, Prime Minister Tsipras appeared to accede to most of the critical demands from the creditors. The Greek proposal, apparently drafted with French assistance, seemed a de facto capitulation, and most analysts had expected a deal to be signed over the weekend. However, this was in doubt after the German Government shocked markets by announcing a one-page plan that gave Greece a choice between an extremely harsh set of conditions and a “five-year timeout” from the Euro. The conditions appeared to be purposely designed to be unacceptable, and involved the immediate transfer of EUR50 billion of Greek public property to a German administrator as collateral, among other niceties. After what can only be described as bomb throwing from German Finance Minister Schauble, further frantic negotiations ensued, and finally an agreement was struck in early London trading this morning.
We do not expect big moves in the Euro, although it rallied somewhat this morning on the back of the positive news. Markets have appeared more positive on the chance of an agreement in Greece than the media or analysts. However, it does mean that the Federal Reserve is on for an interest rate hike in September, and thus we continue to expect a long term weakening of the Euro.
Although overshadowed by the Greek crisis, there was important news out of the United Kingdom last week.
The budget did involve several key changes at the macroeconomic levels, including increases in the tax burden on high-earning landlords, the enactment of a national living wage through the tax code, and an end to the “non-dom” status for foreigners, which allowed them to keep their off-shore income untaxed by the UK. However, the aggregate impact of these changes at the macro level is relatively small, amounting to an additional 0.2% of GDP or so in expenditures for 2016.
Also of notice, yet another Bank of England rate-setting meeting came and went with no change to wither the base rate of the Gilt purchase target. Both the budget and the Bank of England meeting proved to be none events in terms of FX market impact, although Sterling did experience some volatility before ending the week down around 0.7% against the Dollar and about 1% against the Euro.
Last week data out of the Eurozone provided few surprises, and continues to be consistent with a second quarter GDP growth print of around 2%.
Industrial production in Germany rose 2.1% in May, a bit under expectations and now tracking a 1.6% average so far in the second quarter. This relative softness is so far compensated by the strength we are seeing in retail sales. We will have a better view once the final Eurozone-wide industrial production numbers are published next week, but given the lag (May numbers are just being published now) they are unlikely to show any impact from the recent turbulence around Greece.
The JOLTS report from the Bureau of Labor Statistics provided some interesting details on the state of the labour market, beyond the headline numbers of net job creation and unemployment. The May report was consistent with strong job growth. The number of job openings continued to expand, up at a 20% annualized rate since December 2014, and are now at a cycle high of over 0.6 job openings per unemployed person.
This steady improvement clearly supports Janet Yellen’s view that interest rates will rise in 2015, though the minutes of the latest Fed meeting suggested a significant degree of worry over potential spill overs from the Greek crisis. However, given that an agreement has been reached in Greece, this is firmly a green light for a September rate hike by the Federal Reserve.