Greece crisis continues to provide market volatility: another deadline missed


When it comes to the situation in Greece the word deadline appears to be losing its meaning. Today’s Eurogroup meeting in Riga, Latvia is not going to reach any final decisions, since Greek Finance Minister Yanis Varoufakis is not expected to present any reform plans and thus the Eurozone’s finance ministers are not going to agree to the handling to Greece of the remaining money available in its bailout program to the amount of 7.2 billion euros that the country could then use to pay off upcoming debts to its creditors in the eurozone and the International Monetary Fund. If this were to happen then calm would be restored, fostering confidence in the Greek economy and allowing the international markets to relax. This however, will not be case and the so called deadline is now shifted again to a new Eurozone finance ministers’ summit on 11th May.

Fears that Greece will virtually run out of money due to the continuing postponement of final solutions to the situation are culminating and this is why the Greek government is pushing for a loose political agreement. After a meeting yesterday with German Chancellor Angela Merkel, the Greek Prime Minister Alexis Tsipras said he was very optimistic and that they had moved closer to a deal on an economic reform programme that would unlock frozen bailout funds. However, this view was contrasted by EU officials who indicated that wide differences remain over reforms and that much work is still required in order to produce a binding, detailed agreement.

And while Athens is scrapping the bottom of all barrels to find liquidity to push its default a few days back, Merkel said yesterday that everything must be done to prevent Greece running out of money before it reaches a cash-for-reform deal with its international creditors.

Although Greek officials seem to admit that they cannot wait for a deal in June due to their immense liquidity problems, since Athens appears likely to be able to scrape together public cash reserves to meet its payment obligations into June, the real crunch time is set to come at the end of June because without a fresh injection of foreign funds in its coffers Greece will definitely not be able to honour its bond redemptions to the ECB in July and August.

Some analysts claim that kicking the can down the road is intentional and that behind the scenes there is the admittance that the Greece situation is not viable even if the country does receive the remaining 7.2 billion euros, which can only last it so far. They therefore believe that all sides are simply buying time in order to prepare for the inevitable exit of the country from the Eurozone or the adoption of a dual currency. None of course is ready to admit such a scenario in public, especially due to the fear that it would shake world markets.

Currently standing at over 170 percent of GDP the debt of Greece is thought by many to be unsustainable and thus the only real and definite solution could only come through a deal to reduce the burden of Greece’s debts through such measures as extending the date at which the loans are repaid.

The fact remains that despite the optimism of the Greek Premier, default may prove unavoidable and its repercussions will depend on who Greece decides to default on. If Athens defaults on a government bond or loan, then the ECB will have to raise the price that Greek banks pay to access emergency liquidity from the Bank of Greece, thus depriving them of access to fresh supplies of euros.

If instead, the country defaults on its own citizens, perhaps by issuing IOUs to pay pensions and salaries, bank customers may start emptying euros from their accounts which will again lead banks to quickly run out of collateral for emergency liquidity.

Under both these scenarios Athens would have to resort to measures similar to those employed in Cyprus back in March 2013, by introducing capital controls and bank holidays to stop the financial system imploding. This situation would give time for other solutions to be sought while the country would be technically still be part of the eurozone. Such solutions could be found by holding new elections in Greece or a referendum on eurozone membership which could lead to a new political configuration in Athens willing to strike a deal to keep Greece in the eurozone, which seems to be the preferred solution of many EU circles.

Whether there will indeed be time available and whether the system in Greece will manage to avoid collapse in the absence of a viable plan to restore economic and financial stability remains to be seen, with many fearing that the loss of liquidity would have such a devastating impact on the Greece that the situation post-default could quickly spiral out of control, forcing Athens to quit the euro.

A culmination of the crisis or a last minute avoidance of it are both scenarios that are expected to be coupled by high market volatility. Investors around the globe know that turning a crisis into an opportunity is often very possible and could potentially bring high yields if someone follows events closely and is ready to jump on the right side of the market at the right time. Therefore, stay tuned to be prepared to place your trades as events will inevitably unfold in the days to come.