Has Greece just blinked?

A day of headlines has seen the eurozone situation remain fraught, with heightened volatility likely as markets attempt to determine the probable outcome.

Alexis Tsipras
Source: Bloomberg

Given the possibility of further negotiations over the weekend we may see sharply increased levels of volatility in the coming days. You may wish to reduce or hedge your market exposure in advance of any potentially significant events, or deposit additional funds onto your account to provide extra cover for your positions.

Update: Germany has said that it rejects the Greek proposal, with the letter failing to offer a ‘substantive solution’ to the crisis. It seems we may be back to square one, with tomorrow’s Eurogroup meeting likely to be a fraught one. 

 

Athens has submitted a formal request for a six-month extension to its loan agreement, with Alexis Tsipras’ government offering up significant concessions in a bid to avoid entering March without any financial support.

Eurogroup ministers will now meet on Friday afternoon in Brussels to discuss the request, according to the chairman of the group, Jeroen Dijsselbloem.

The key development is that Greece has accepted that any extension would need to be overseen by the Troika of the European Central Bank, the IMF and the European Commission. Mr Tsipras had previously said that this monitoring system was no longer acceptable. Even if other points are still subject to discussion, this in itself is progress.

In addition, Greece has committed, it appears, to maintain its budget surpluses (i.e. no fresh government spending beyond that permitted), as well as recognising the existing framework as the only possible one available, as well as refraining from any unilateral actions that could hinder achievement of fiscal targets.

This morning’s developments underscore my view that Greece’s hand in these negotiations has always been the weaker one. Syriza swept to power promising an end to austerity, but also that Greece remains in the eurozone. One or the other of those promises had to be dropped, since together they were incompatible to the rest of the currency union.

The Eurogroup may now be in a mood (it is hoped) to offer some face-saving compromises to Mr Tsipras, perhaps allowing him to rename the Troika to something less inflammatory, as well as changing the wording to suggest that the government is not actually extending the current programme (even if it is).

If we do get an agreement tomorrow during the Eurogroup meeting, it will allow Mr Tsipras to have a ‘Chamberlain moment’, waving a piece of paper that he can say achieves his goals while keeping Greece in the euro, for the time being. It tides Athens over for a few more months, but more discussions will be needed.

For the time being, markets have reacted positively. Indices have rallied off their lows and US futures are now pointing firmly higher. Meanwhile the euro is a touch more sceptical, being unchanged on the day despite a spike above $1.14. We should not get carried away – the meeting could still break down in a similar fashion to Monday’s session. But for now, a deal looks possible in a way that was unimaginable just 24 hours ago. 

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