UPDATE 1-EU’s Tusk tells Tsipras no chance of bailout extension

30 Jun 2015 | Author: | No comments yet »

Debt default no guarantee of a Greek exit from eurozone.

NEW YORK: The euro strengthened against the dollar on Monday (Jun 29) despite Greece’s institution of capital controls and shutting banks ahead of an expected default on its debt.Stocks have been belted around the globe — falling 3.6 per cent to 3.7 per cent in Germany and France, while in Italy and Spain, equities were down 5.2 per cent and 4.6 per cent respectively.Stocks took a hit on the news of no deal over the weekend between Greece and its creditors, though the losses are less than the declines in European and Asian markets.

Out of money, cut off by its creditors, its banks shut, the struggling country will vote Sunday on whether to accept painful cutbacks in return for desperately needed financing.The country of the Parthenon is poised for a fresh collapse on Tuesday, when the Greek government is expected to miss a 1.6 billion euro ($1.8 billion) payment to the International Monetary Fund (IMF).

The following day, the European Central Bank froze emergency funding to Greek banks at their current level of around €89 billion, forcing Athens to close the banks to stop a flood of deposit withdrawals. U.S. markets got hammered Monday as the Greek debt crisis deepened, with investors pushing the Dow down 350 points — and back in the red for 2015 — after steeper sell-offs in Asia and Europe. Between now and then Greece remains suspended between collapse and an uncertain rescue, between membership in the 19-member euro club and the possibility of a humiliating exit.

The default will send the already cratered economy on a course that’s uncertain in almost every way except for its direction and general velocity: downward and fast. Athens’ shock announcement of a Jul 5 referendum on creditors’ bailout proposals effectively broke off negotiations that would extend the government’s financial lifeline.

Tsipras and his radical leftist government are urging on Greeks to vote “no” in order to strengthen Greece’s negotiating position with Europe and the IMF over what reforms the country needs to adopt to receive fresh financial assistance. In any case, what is critical to understand is that this default — or non-default (however you want to view it) — isn’t necessarily a catalyst for a Grexit.

If you’re in the Greek labor force, there’s a one in four chance you’re unemployed at the moment — unless you’re 25 or younger, in which case your chance of wall-leaning and stoop-sitting is more like one in two. Indeed a Bloomberg survey of economists (conducted in April) found that while 40 per cent expected the Greeks to default at some point, nearly 80 per cent suggested that this wouldn’t then lead to a Grexit.

Hundreds of people gathered near Parliament in Athens on Sunday and Monday, denouncing the IMF and passing out leaflets that favored a default over continued budget cuts. He also raised the prospect that his government might quit if Greeks vote in favour of austerity. “If Greeks want to continue with perpetual austerity plans, which will stop us from raising our head … we will respect their choice, but we will not apply it.” And Tsipras reassured Greek voters, arguing the country would not be forced out of the euro zone, because the financial costs would be too high. “I don’t think that their intention is to push Greece out of the euro zone but to put an end to hopes that there can be a different policy in Europe,” he said. Kathy Lien of BK Asset Management said that many traders were “thoroughly confused” by the euro’s performance on Monday, because with an IMF default looming, the euro should be trading much lower against the greenback but instead it was much higher. “We do not believe that the turnaround in the currency represents the market’s satisfaction with the imminent default,” said Lien. “Some investors are still hopeful that a deal would be reached eventually given the supportive comments from eurozone officials.” Standard & Poor’s, meanwhile, downgraded Greece’s credit rating deeper into junk territory, saying it saw a commercial debt default within the next six months and a 50 per cent chance Greece will exit the eurozone. A ‘no’ vote, however, “will mean that Greece is saying ‘no’ to Europe.” Juncker also deplored the fact that the “spirit of compromise” was “broken unilaterally by the Greek decision to organize a referendum”, adding that he felt “betrayed” after all his efforts to reach a compromise. How Wall Street reacts going forward to the mounting crisis in Greece and the rising odds of a Greek exit from the 19-nation eurozone could provide investors with a better sense of how vulnerable markets are.

To understand where Greece is headed, what it means for Europe, and whether we should all invest in bunkers, gold bars and bulk food, it’s necessary to trace the story back a few years, and then follow the thread forward. Greeks will be asked to vote if they support a bailout deal that creditors have proposed that involves budget cutbacks and tax increases in exchange for the remaining loans in the country’s rescue program. But she appeared to see little chance of any hope of finding a compromise this week. “The position will not change: solidarity and effort go hand in hand”, Merkel noted, adding that it was not a question of providing assistance without conditions.

However, if Wall Street trades calmly, as it appears now, and losses don’t worsen dramatically, it could act as a calming influence on world markets on a difficult day. But he also stressed that France and the rest of the eurozone are now in a better position to withstand a Greek departure. “Today the French economy is robust—much more so than four years ago—and it has nothing to fear from what could happen,” he said. U.S. stocks, of course, are still trading near record highs, and by at least one valuation metric, the price-to-earnings ratio, the market is overvalued relative to history.

Bill Hornbarger, chief investment strategist at the Moneta Group, said late Sunday night that he expects markets to be lower today, but added that the drop in the U.S. “won’t be too severe.” The reason: a break down in bailout talks between Greece was never ruled out entirely by Wall Street. “This has always been a possibility,” says Hornbarger. Between 2004 and 2007, the world economy expanded rapidly, and Greece’s deficit problems disappeared beneath a wave of cheap loans and foreign investments.

Among the issues later identified: Huge public pensions, generous official retirement ages in the mid-50s, widespread corruption, a culture of tax evasion, and insanely bloated government salaries. And not knowing if Greece will stay in the euro or exit the 19-nation economic and political group creates a lot of angst. “The uncertainty about the payment, let alone the surprise from (Greek Prime Minister Alexis) Tsipras to stage a referendum, is enough to create increased uncertainty as to whether Greece leaves the euro,” he says. That would hurt the countries financially, in the longer term, and market pressure could conceivable force them out too if they run into trouble. “The collapse of Lehman Brothers came as a shock to the markets,” Efstathiou said. “In contrast, Greece’s dire financial position has been discussed to exhaustion, for many years now, and its bonds have been trading at distressed levels for many months.” Which is probably why Tsipras appears to have little support among the countries leading newspapers and commentators, and he certainly has no moral legitimacy left.

Finally, back in January, Alexis Tsipras rose to power on the promise of better terms on those loans, and a plusher life for the country’s agonized people. So while Tsipras may argue that the referendum is a win for democracy, this doesn’t appear to be a view shared by most of the major Greek newspapers. They feel he will have to about face and eventually agree to the reform measures outlined by creditors — most likely at an emergency summit to be held on Wednesday. Blaming the continent’s bankers for his political woes, Tsipras walked away from the negotiating table Sunday, calling for a vote on the new austerity measures. That will shock the whole system, but it may be the only way the country’s banks can give account holders their money, and still function themselves.

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