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Greece Talks Break Down Early

As expected, we saw no agreement between Greece and its creditors yesterday. Despite both sides of the table saying they were willing to negotiate into the night if needed, talks actually broke down before we left the office. The stumbling blocks remain the same, with Greece pushing for a bridging loan rather than a bailout extension and Europe not willing to rebrand the extension as a bridging loan. 

Head of the Euro-group, Jeroen Dijsselbloem has said Greece now has until Friday to formally request a bailout extension, which he believes is the best way for Greece to continue to finance itself, whilst they continue negotiations around a long term solution. The problem for Greece is that an extension of the same bailout doesn’t change anything and Syriza weren’t elected based on promises of more of the same.

Time is running out though, with JP Morgan calculating that Greek banks will run out of collateral in as few as 14 weeks, assuming cash withdrawals stay around the €2bn per week level that they currently are. With such a short amount of time, it is very likely that, if this drags on, there will have to be some sort of capital controls put in place to prevent a run on the banks which would put them out of operation.

As we see it, controls on capital would be the first step to accepting the Greece is on its way out of the euro, so that becomes a tight rope to walk. On top of that, we could actually see some contagion of the situation. A number of Portuguese politicians and businessmen wrote an open letter to the leaders of government asking them to show “solidarity and understanding” towards Greece and to avoid engaging in “humiliation of other member states”. If Greece do get a better deal from Europe, or leave the euro, Portugal then becomes the weakest member of Europe with the worst bailout deal. As such we don’t think it would be long before we saw protests in Lisbon.

In the markets, the news of the breakdown in talks sent the euro immediately lower. European stock markets had closed by the time the news had broken, but were down slightly on the day anyway, as nobody put their faith in an agreement being reached. Luckily the US session was closed for President’s day, so the fallout was limited.

Overnight we’ve seen Asian markets mixed, with China slightly up, despite news that house prices fell 5.1% in the month of January. The optimism in the face of the news could well be down to Chinese New Year holiday, which starts tomorrow.

From Australia, we saw the minutes from the central bank’s last meeting, where they decided to cut interest rates. Unsurprisingly the decision was motivated by a deteriorating economic outlook, but their decision was brought forward a month because they wanted to use their quarterly economic statement, released three days after the cut, to be able to explain their motivations. The RBA are still pushing for a weaker Aussie Dollar, with a number of comments around it’s continued strength (despite it being 15% weaker than it was in September) and are hopeful that getting one would mean they are able to re-balance the economy.

Today we look at UK inflation data, the German ZEW index and, form the US, the empire manufacturing survey. On top of the data, we won’t be surprised to hear European finance ministers and central bankers making comments over the Greece situation, which is still going to dominate risk sentiment until some kind of resolution is found.