Greece Preparing for IMF Default

The massive EUR 1.70 billion repayment due to the IMF today will not be made according to Greek government officials, paving the way towards default on other obligations. Although it will not necessarily be deemed a default according to the IMF, it will place increased pressure on European policymakers to potentially return to the negotiating table as the rising costs of a Greek referendum could place the European Union’s credibility at risk. Meanwhile, as the Greeks enter day two of capital controls, the ECB has placed a cap on further Greek ELA distributions which could spell the end of any remaining solvency for Greek banks. However, the unfolding situation is proving a boon for the European Central Bank, paving the way for increased monetary accommodation with the Central Bank making preparations to expand the quantitative easing program to include other assets. European benchmarks plunged on the uncertainty, with the French CAC 40 giving up -3.74%.

Following the weakness that encircled capital markets yesterday, Asia has managed to bounce back in the overnight session, driven primarily by gains in the Shanghai Composite which has risen 5.10%. Increased monetary accommodation in the form of rate cuts and reserve ratio cuts are beginning to take hold although there is increased speculation that China will be forced to implement its own robust quantitative easing program. This comes after the Central Government embarked on a program to alleviate local governments of debt bearing exceedingly high interest rates, numbering approximately CNY 20-23 trillion according to estimates. While replacing existing debt with new debt is an effective refinancing, the expansion in the amount of outstanding debt will likely force the People’s Bank of China to soak up the additional liquidity through asset purchases, otherwise known as quantitative easing. Meanwhile, the Yen continues appreciate versus peers, with USDJPY slipping to just over 122.00.