Week Ahead & in Review

WEEK IN REVIEW

The Greek parliament passed the second package of reforms this week – a crucial step for Greece to obtain its third €86bn bailout. Amongst the reforms was a simplifying of Greece’s value added tax system, as well as an overhaul of its pension scheme. Backers of the package now include ex-Minister of Finance Yanis Varoufakis.

The approval of the reforms has helped give momentum to ongoing negotiations, with Athens receiving a €7.2bn EU bridge-loan financed by the European Financial Stability Mechanism, and clearing its €2.5bn arrears with the IMF and a €4.2bn ECB bond payment that was due this week. They also settled a €0.5bn loan with the Greek Central Bank.

Negotiations for the third bailout have also begun, but may last until August 20 – the deadline for a new €3.2bn ECB bond repayment. The EFSM fund, which still retains around €6bn, may have to provide yet another loan if no deal is reached by August 20.

But the complications don’t stop there: for a third bailout to be negotiated, creditors are demanding further reforms on labour laws and product market restrictions. More importantly, Greece needs to arrange for further financing of its bailout package, as the EU fund led by Klaus Reeling is only preparing a package of €50bn. With private bond markets spooked, and signs that Greece’s supposed primary budget surplus was wiped out during the economic chaos of the last month, it is likely that Greece will have to sign new loan deal with the IMF. The institution, however, has made it clear that it will not approve a new deal nor distribute the remaining portion of second bailout – around €16.5bn – so long as long as Greek debt levels remain unsustainable. If neither Lagarde nor Merkel cede, the most likely outcome will revolve around the idea of extending grace periods and maturities for existing loans.

Data releases:

According to Eurostat, during Q1 2015, the European Union public deficit figures declined to 2.6% of GDP, lower than Q4 2014 and Q1 2014 respective figures of 2.8% and 3.1%.

In Portugal, the IGCP sold €1,5bn worth of Portuguese 10yr bonds with maturities between 5 to 22 years – higher than the initial sale estimates of €1.25bn. As of Friday’s afternoon, yields on Portuguese 10yr securities were down to 2.520%, with 5yr and 2yr bonds also down at 1.309% and 0.389% respectively. According to the Bloomberg World Bond Indexes, Portugal has had the “best-performing sovereign-debt market over the last 6 months”, averaging returns of 1,7% in contrast to the 1.3% loss on German securities. The Portuguese stock market, PSI–20, was also down 0.60% this Friday, after falling to 5 790.30.

Data wise, INE released statistical figures for Q1 2015 in Portugal which suggest the economy achieved to reduce public spending, currently at 5.8% of GDP, relative to the Q1 2014 figure of 5.9%.

With regards to the upcoming coming election, this week President Cavaco Silva announced parliamentary elections will take place on October 4, 2015. Finally, the PSD and CDS-PP coalition government also announced it wants to delay the phase-out in the reduction of the municipal taxes on real estate transmission (IMT).

 

WEEK AHEAD

In the coming week, much of the data to be published could shed light on prospects for Q2 2015 GDP figures in Europe and in the US (flash estimates for Q2 GDP in Europe will be out August 14).

29 July

  • The Federal Open Market Committee (FOMC) meeting announcement will occur; markets are on alert for further details regarding timing of future US rate hike;
  • Pending Home Sales Index for June, US (National Association of Realtors);

30 July

  • Advanced US GDP figures for 2015:Q2 (Bureau of Economic Analysis)
  • Confidence indicators for Europe – July (EU Commission)
  • Unemployment in the EU – June (Eurostat)
  • Portuguese Industrial Production – June (National Statistics)

31 July

  • US Employment cost index for 2015:Q2 (Bureau of Labor Statistics)
  • Flash estimate Eurozone inflation – July (Eurostat)