Endless negotiations between the IMF / EU / ECB troika and the Greek government are expected to conclude during October. Or are they?
A lot of can kicking has been done over the last few months, and this exercise could continue once again.
A Precedent is Dangerous
It remains unclear what Germany wants: Chancellor Angela Merkel is playing the good cop, repeating the message that she wants Greece in the euro-zone. At the same time, finance minister Wolfgang SchÃ¤uble returned to his old passive aggressive mode.
Merkel has reportedly leaned towards letting go of the “bottomless pit” as her finance minister once said, and then totally changed her mind and is ready to aid Greece at all costs.
Greece’s share in the euro-zone’s GDP is minor, and banks are much more prepared than 15 months ago, when the debt restructuring idea was initially announced. However, the precedent of a member leaving the currency union opens the door for other countries to leave. A Spanish exit for example, would already severely endanger German banks and the German economy.
The current level of trust in the EU’s announcements is low. So, if Greece leaves and leaders bring forward a united message that this is a unique case, many will ignore such a statement in disbelief.
Why Not in October?
- Previous can kicking: On August 20th, Greece had a bond payment to the ECB that it didn’t have the money to pay. What happened is that the ECB bended its ruled, lent money to Greek banks, and these banks bought 3 month Greek bills that the Greek government auctioned just for them. The banks then used these bills as collateral. The Greek government used the money to pay the ECB and to avoid a default. This revolving door trick seemed to have worked well, and might be copied once again.
- Current Can Kicking: During September, the troika took its time Greece, entering and exiting negotiations and not rushing to declare deadlines. There is a Eurogroup meeting on October 8th, and an EU summit on October 18-19th. This doesn’t necessitate decision making: Greece could be taken off the official agenda until negotiations materialize. This could be pushed back as far as leaders want to.
- Juncker: Another reason to believe that the Greek exit will not happen now is what the head of the Eurogroup, Jean-Claude Juncker said: he doesn’t believe that Greece will leave the zone at the end of autumn and probably not afterwards either. October is at the beginning of the autumn.
- US elections: There were unconfirmed reports that Obama doesn’t want a major economic shock from Europe before the US Presidential Elections on November 6th. Most if not all European leaders, from all parties, would prefer seeing Obama rather than Romney in the White House. It’s unclear what role the US has in the Greek crisis, but it is clear that negotiations are endless.
What is the solution?
Greece says it only wants more time and not more money. As time is money, this claim is somewhat awkward. Nevertheless, many European countries and the German opposition have adopted this approach, and officially seek to slightly loosen the conditions.
The troika wants Greece to make more efforts in balancing the budget, hopefully reaching a primary surplus in 2013 – wishful thinking. So far, the measures that Greece took just worsened the economic situation that can be better described as a depression. The various Greek governments also had their share in the situation.
The prescription, as always, is more austerity. It’s quite hard to understand how failed solutions are adopted over and over again by the Greek government and by the troika.
The Greek public doesn’t like it at all. Protests in Athens resumed after a relatively calm period. After a bitter election campaign in June, center right, pro austerity New Democracy won the elections and continued taking more austerity measures. In the meantime, this party and the center left socialist PASOK party continue losing ground in the polls.
The main opposition party, SYRIZA, led by Alexis Tsipras, is gaining traction. So is the neo-Nazi Golden Dawn party, which was almost erased in 2009 and could now win the third place.
No new elections are planned in Greece, and the current three party coalition politicians would not want to risk losing their seats. However, if the troika goes too far, either PASOK or the Democratic Left parties could decide to quit the government and to say enough is enough.
Such a scenario isn’t likely in October: the troika and the Greek government are likely to continue taking their time, without rocking the boat too much – the troika isn’t expected to make impossible demands, but also isn’t likely to compromise on soft measures.
If we do get a surprise breakdown in negotiations and a Greek exit of the euro-zone, here is how to trade the Grexit with EUR/USD.
This article is part of the October monthly forex outlook. You can download the full report, including the currency technical outlooks and the relative strength index by joining the newsletter in the form below.