Greeks decide which Demis Roussos song they prefer: “Forever and ever” or “Goodbye my love, goodbye”

Week in review: Europe and US continue to recover, uncertainty increases in Greece: After the second Greek bailout programme expired and Greece missed a €1.5bn payment to the IMF on Tuesday, Prime Minister Tsipras sent a letter to Greece´s creditors informing he would accept the conditions imposed in the previous proposal, but those conditions would have to be further negotiated and adjusted to Greece´s demands. Moreover, he requested a third bailout programme worth €29.1bn excluding the IMF. Finally, the Government called for a referendum to vote for or against the conditions imposed by creditors to extend the previous bailout (see below). Meanwhile, the IMF has argued in a  recent paper on Greece that it will require further debt restructuring, particularly maturities’ extension,  in order to the make its debt sustainable.

Despite this uncertainty markets remained broadly calm elsewhere in Europe in the world. First, Greece is a rather small country within the EU. Second, ECB’s determination to support the more fragile countries within the Euro area should avoid any significant contagion risk.

Datawise, the composite PMI edged up to 54.2 in Europe, after 54.1 in May, pointing to dynamic growth in the second quarter

Elsewhere in the world, the US labour market is showing signs of recovery with a 223 thousand rise in non-farm payrolls in June, The unemployment rate fell to 5.3% in June, which represents a 0.2 percentage points drop from the unemployment rate in May. Though employment growth remains steady, earnings remain subdued (unchanged relative to last month and up a feeble 2% yoy). This may lead the Fed to delay the first rate hike, that most analysts expect is likely to come in September.

Week ahead: Greeks decide: Forever and ever or Goodbye my love, goodbye

Sunday 5 July: Referendum in Greece: Greeks will have to decide, like two of Demis Roussos songs, whether they want to say goodbye to the euro or want to stay in Though the referendum is somewhat nonsensical as it regards an expired bailout programme, a yes or no will be interpreted by the Government and the EU as a willingness or not to accept further reforms in order to obtain new funds:

  • On the one hand, a “Yes” would demonstrate the willingness of the Greeks to endure the hardships of a new bailout programme in order to preserve their position as part of the Monetary Union. The result would probably be that Greece’s official creditor would accept negotiating a third bailout, with emergency funding to avoid Greece defaulting on the ECB in July. The Government would have to be significantly remodeled or snap elections would be called (Varoufakis has said he would resign if Greeks vote for the creditor’s proposals). Capital controls would probably remain in place, possibly in a softer form, at least until the new bailout would be signed.
  • On the other hand, a “No” would very likely lead to the end of negotiations, as the EU is unlikely to deliver further funds without further reforms. In that case, Greece would default on almost its entire debt, including the ECB’s, since there are not even enough revenues to pay state workers and pensioners from July onwards if a new rescue programme is not settled. Without EU and IMF funds, Greece would probably turn to Russia and China for help, but these countries would be unlikely to help. The ECB would be forced to significantly curtail or even stop financing the financial sector due to the default on Greek debt it holds, resulting in the bankruptcy of many Greek banks. Capital controls would remain in place, possibly in a stricter form, and Greeks would hoard euros, returning to a form of barter economy. In order to pay wages and pensions the Government would start issuing IOUs, the use of euros would be significantly reduced.

Tuesday 7 July:

  • German industrial production is seen easing somewhat in May to 0.1%mom after a 0.9%mom jump in April. Still, Germany is likely to remain the main growth engine in Europe.

Friday 10 July:

  • France Industrial production: IP was -0.1%yoy in April, the May figure should show s0me recovery, but is unlikely to change much the view that France’s activity growth remains well below par.
  • Portuguese CPI inflation: inflation has finally left negative territory and should remain positive in June, thanks to a significant improvement in demand over the last few months and a respite in energy prices’ declines