Greece can’t pay… now what?

<p>Greece has reached D-day, they literally will default (or fall into arrears, in IMF parlance) if they don’t pay up some EUR 1.6 bn by […]</p>

Greece has reached D-day, they literally will default (or fall into arrears, in IMF parlance) if they don’t pay up some EUR 1.6 bn by midnight Athens time tonight. There have been various rumours all morning that another last minute deal may be on the table, but news of this deal seems to have fizzled out, and even Angela Merkel said that the only offer that she knows from Greece is from last Friday. This doesn’t suggest any last minute deals are likely and we expect Athens to miss its IMF payment, and those thereafter, in the coming days and weeks.

So, how is the market preparing for the first default by a Western nation in more than 60 years? After yesterday’s sharp sell-off, it is dealing with it in a fairly stable manner, for example:

  • EURUSD trading in a tight 100-pip range and is back above the 50-day sma at 1.1155.
  • German 10-year bond yields have been rising today, although we remain below the levels from last Friday.
  • 2-year German bond yields are also stable.
  • Stocks are fairly neutral, unlike FX, which managed to recover Sunday’s losses; stocks remain in a neutral holding pattern as we wait for further info from Athens.

So, what could happen if Greece does default?

Surely, there is no news that we don’t know already? We’ve known that this payment is coming for months now, and the Sunday/ Monday sell-off may have seen the bulk of the pricing in of the bad news… However, when it comes to Greece there is always the potential for more surprises around the corner. For example, although Russia has denied it will help to finance Greece, if it does manage to lend Athens the money required then would this be good or bad for the currency bloc???

In our view, the biggest risk for Greece (and by extension the currency bloc and risk sentiment in general) is the upcoming referendum. However, there is a huge amount of uncertainty regarding this. Greeks are being asked to vote on whether or not they want to accept the terms of the EU bailout. If they vote no then surely Grexit would be upon us? Apparently not, according to the German Finance Minister who said that Greece could stay in the EUR even if it votes no…

At this stage we continue to think that a no vote from the Greeks is a vote for Grexit. If a no vote is confirmed late Sunday/ early Monday then we could see risk sell off once more. From a technical perspective, if Monday’s lows are breached in the EUR and European stock markets then we could see more carnage to come, however, we may have a few days of calm before the Grexit storm.

Don’t forget the US…

Another factor that markets need to digest is US economic data. We believe this could be a week of two halves from a market perspective, the first half could see Greece dominate, while the second half could see the US and a potential rate hike from the Fed come back into focus.

If we see a strong ADP, ISM manufacturing and NFP report later this week then can the Fed shy away from a rate hike? We saw risk shrug off fears that the Fed could hike rates twice before the year end, and instead US equities tanked on the Greek news and general market sentiment. If we see yields spike on the back of some good US data then markets may struggle to recover as a Fed rate hike alongside Greek troubles could prove too much for the bears during this sunny summer weather.

Takeaway:

  • All is calm ahead of a likely Greek default this evening.
  • The EUR is in recovery mode, but stocks are fairly neutral.
  • This could be a week of two halves, with Greece in focus at the start of this week before we head across the Atlantic for inspiration ahead of NFPs.
  • The next Greek issue that could rattle market sentiment is the referendum on Sunday and Grexit fears. Tonight’s default seems to be pretty much priced in.

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