Five days to save Greece

Following the European summit, it is clear that the referendum held on the 5th of July and the attitude of the Greek Government have only increased the exasperation of European leaders. Alexis Tsipras inquired about a new aid plan organised by the ESM (European Stability Mechanism) including a 30% haircut on Greek debt and temporary financing of € 5 billion until the end of July, the time to negotiate the plan. However, Alexis Tsipras and the other Greek representatives came to the negotiating table with apparently very vague proposals.

European countries have sent Greece what appears to be an ultimatum. The exact sequence is as follows: on Wednesday, the Eurogroup must approve the request for help addressed by Greece to the MES; if agreed, the European Commission must then evaluate the request and the propositions that Greece should announce by Friday at 8:30; on Saturday a Eurogroup meeting will examine in turn these proposals and a European summit will then be held on Sunday.

If unsuccessful, Jean-Claude Juncker hinted that the scenario of a “Grexit” was ready and that humanitarian aid would be conceivable. The fact that Sunday’s summit has been extended to the 28 European countries is presented as a sign that a radical decision could be taken. A certain number of countries in the Eurozone seem to think that a euro exit is the only solution. Even François Hollande, although, among the most conciliatory towards Alexis Tsipras has called for him to make more credible and serious proposals and to respect the necessary rules for communal life within the euro area. Moreover, Angela Merkel has rejected any idea of ​​a haircut on the debt. To sum up, the other 18 countries members of the Eurozone and the European Commission hold Greece responsible for its future.

Even if it is the focus of much attention, debt restructuring is probably not the most important issue: in 2014, creditors were willing to increase the maturities in exchange for reforms. However, this last topic is problematic: Athens has destroyed the confidence of creditors in this respect, hence the request for a detailed plan of reforms.
Consequentially, the next few days are crucial and marked with great uncertainty. An agreement is not to be excluded, but will be difficult to obtain. If no solution is found on Sunday, the ECB will probably be forced to interrupt the Emergency Liquidity Assistance (ELA), which would cause the collapse of the Greek banking system and ultimately the exit of the Eurozone

What are the consequences on asset management? As we have already stated, even a “Grexit” would not question the economic upturn in the euro area. In particular, the judgment of the European Court of Justice gives discretion to the ECB to avoid a contagion to the sovereign debt of other countries in the Eurozone. According to analysts’ forecasts, earnings per share of Euro Stoxx companies are expected to increase by nearly 15% in 2015 and as much in 2016. For the past two months, these numbers have started to be revised upwards. The markets are now gradually absorbing the Greek shock with a 14% drop from the highest level on April the 13th.

Uncertainty remains high but current levels seem opportune in our opinion to reinforce the equity exposure of the euro area.

 

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Julien-Pierre Nouen

Directeur des études économiques et de la gestion diversifiée