Deal Potential Propels Risk Rally

Market Trends - 10/07/2015

News of the potential for a Greek deal after a formal request for an ESM bailout loan were submitted raises the specter of a potential deal before Sunday if creditors agree to the concessions made by Greece in the latest set of proposals. In a plan that closely mirrors a tabled solution put forth by creditors proposed before the referendum, Greece seems to be making a complete u-turn in negotiations after compromising on key points like pensions and taxes. Even though the IMF and United States are urging debt relief for Greece, Germany seems unmoved to provide any special considerations, fearing that other Mediterranean states will request similar relief measures to reduce burgeoning debt-to-GDP ratios and lift austerity driven policies. Not to mention, these moves by the Greek Government are likely to anger not only party members, but the Greek electorate that overwhelmingly voted no to more austerity, setting the stage for increased anger and resentment towards the current Athens administration.

Even if Europe agrees to the latest proposed measures, it will likely prove a pyrrhic victory for Germany and Brussels as anti-euro sentiment grows. The proposals now being debated with creditors only extend the duration of the problems and further inhibit a future recovery. Although considerably more painful in the short-term, a default, exit, and parallel currency issuance would enable a quicker recovery for the Greeks. Even though Euro Area leaders are more confident the latest deal with help the Greeks survive the medium-term, the deal in its current form does nothing to address the long-term sustainability issues raised by the IMF. Greece and creditors will likely find themselves in an identical quagmire before the term of the proposed 3-year loan expires, meaning that nothing will really be solved by implementing the latest offer. Nevertheless, risk assets continue to rally on the optimism that a deal might get done, despite the inherent consequences of a strategy embodying more of the “extend and pretend” mentality that brought on the most recent developments.


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