Greece: After the Eurogroup, what next?

February 12, 2015

The Eurogroup meeting of Eurozone finance ministers ended on Wednesday without any resolution on how Greece will secure external financing once its EUR 170 bn bailout expires at the end of this month. Five years ago this would have triggered market panic, however, apart from a 10+ basis point increase in Greek 10-year bond yields, the market’s reaction, so far, has been sanguine.

Is the market being too complacent?

In the aftermath of the news that Greece and its counterparts at the Eurogroup could not agree on the wording of a statement, let alone new terms of a bailout deal, the EUR has actually appreciated. EURUSD is looking constructive, and if we can get above 1.1350 then we may see back towards the 6th Feb highs at 1.1450, see a technical outlook below. Even EURGBP is rallying after hitting a fresh 7-year low on Wednesday.

Although the FX market tends to be less scrupulous than the bond market, there are a few reasons to look on the bright side:

1, There is still time to reach an agreement. There is more than 2 weeks until Greece’s bailout expires, which means that there are plenty of opportunities to hold all-night summits to finally reach a deal in the nick of time. The fruitless end to this meeting kicks the can down the road to the next Eurogroup meeting on Monday.

2, A delay to proceedings makes a deal more likely. This may sound counter-intuitive, but we believe that the Eurozone won’t cut Greece loose, so the closer negotiations get to the 28th Feb deadline, the greater the chance of a breakthrough in the deal or some sort of bridging loan to avoid Greece having to default on its debts as early as next month.

3, Although Jeroen Dijsselbloem sounded fairly short during the press conference last night the Greek finance minister sounded upbeat. This may be the outcome that the Greek government wanted. By pushing out proceedings and playing hard ball, Stournaras and co. still stand a chance of getting what they want. We think that one side will eventually blink the closer we get to the deadline on the 28th Feb, and Athens will be hoping that they won’t be the ones to blink first.

Overall, the market’s reaction, or lack of reaction, is a mixture of expectations that the bailout will eventually be extended, and that a Greek default/ Grexit may not be that big of a deal. As we have been saying in recent months, the Eurozone has strengthened its institutions in the wake of the sovereign debt crisis, banks have substantially reduced their exposure to Athens and the ECB has embarked on QE so there is already a safety net in place if the currency bloc is left facing another crisis in the coming months.

Watch what you wear:

On Wednesday, the Greek finance minister wore an open-necked shirt and casual jacket for proceedings along with a Burberry scarf. Maybe this was a sign that Greece wasn’t taking this round of negotiations particularly seriously. If Stournaras starts wearing a suit to Eurogroup meetings that is when we can expect a deal!

EURUSD: the technical view

For now this pair seems happy to move sideways, however the inability to close above 1.1359 suggests that there could be persistent selling pressures. If we do crack this level then watch out for 1.1450 –a declining trend line – which could thwart the bulls.

In the longer term we continue to think that this pair is vulnerable to a break below 1.10, however we think the driver is more likely to be relative monetary policy stances rather than a Greek default.

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