Relief Following Greek Developments

Last week’s events surrounding Greece have led to relief on the financial markets. Without exception, the stock markets climbed, as did the bond markets on Europe’s periphery.

The change began with the deal that Europe’s government leaders reached on Monday morning, following an all-night meeting. The deal had every appearance of strangling the Greeks, and that was in fact necessary: economic conditions in Greece have gone downhill rapidly, and tougher measures are needed to get the country’s economy back on track. Further developments followed in rapid succession.

On Wednesday Greece’s parliament voted in favour of the deal, even though the opposition provided more votes than the parties making up Syriza. This gave the country access to bridging funds and secured the measures to be implemented immediately: a broader basis and higher rate for VAT, pension reforms, statutory formalisation of semiautomatic austerity measures if economic conditions worsen and independent status for the statistical authority ELSTAT.

Parliaments in other countries have yet to give the deal their backing. By Friday only France and Finland had approved it. A great deal would hinge on Friday’s vote in Germany’s Bundestag. At the same time, the IMF continues to urge Greece’s creditors to make the debt more sustainable, which presumably will mean easing the terms (even lower interest and even longer repayment deadlines), as Germany is fiercely against actual relief.

In the meantime the European Central Bank (ECB) has resumed the emergency funding for the Greek banks and approved a further EUR 900 million. According to Mario Draghi, the better part of the Greek government debt – EUR 130 billion of it – is now in ECB hands. Once the national parliaments give the deal their backing, negotiations can begin about a third bailout programme (this time from the ESM, the European Support Mechanism). However, this is not a sure thing yet, particularly with Greece’s economy deteriorating further, and implementing the reforms might also still pose difficulties.

Despite the favourable response to date, the possibility of a Grexit is still present. Nevertheless, the stock markets shot up last week, by around 2% in the United States and generally by twice that in the eurozone. Asia’s markets also continued their recovery, boosted by encouraging Chinese international trade, industrial output, retail data, and most importantly the Q2 Gross Domestic Product (7%). Ten-year yields in Spain and Italy fell by 5 and 18 basis points, respectively, and in Greece by an astonishing 200 basis points.

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