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Despite these differences in opinion, it seems that the latest emergency summit has produced a broad framework for a deal between Greece and its creditors. While no deal has been confirmed, it’s believed that there is broad consensus on introducing new taxes on businesses and the wealthy, limited increases in VAT, increasing pension contributions and stopping early retirement, while leaving public sector wages and pensions untouched.    

There also seems to be a difference of opinion in regards to budget surplus targets in the coming years. European finance ministers have stated that Greece has agreed to a budget surplus of 1% of GDP in 2015, 2% of GDP in 2016, and 3.5% of GDP by 2018. Representatives from Athens dispute this and claim that no overall deal has been agreed yet.

What happens next?

The markets are now hopeful that a last minute deal will be agreed after months of difficult negotiations, which seems to be a common trend in Eurozone negotiations. One thing these talks have demonstrated that the International Monetary Fund wants to see credible concessions on economic reform from the Greek government. Despite this progress, there are still three potential outcomes to consider:

A last minute deal

This is now the expectation from the markets, investors and commentators. For this deal to be confirmed, the Troika are going to have to embrace a degree of debt forgiveness, or adjust their schedule for loan repayments. Based on the broad framework mentioned above, it looks like the Greeks have had to make certain pension concessions and agree to business tax rises. Should this deal go ahead, the reaction from other European partners, such as Spain and Germany, will be interesting to watch. Spain has played by the rules in regards to its European bailout, while Germany will not be happy at further concessions being given to Greece. From a market perspective, this is the option that will cause the least amount of volatility, meaning that investors and businesses will be hoping a last minute agreement can be reached.

No deal & Grexit

Should no deal be reached by June 30, Greece will have four weeks to find the money and pay its European partners. However, a separate European Central Bank bill is also due on July 20. Should Greece miss these deadlines, it’s very likely that the Troika will cut off its emergency loans to the Greek banking system, restricting liquidity, and ultimately forcing Greece to default on in its debts. In this situation, it’s difficult to see how Greece could feasibly stay in the euro. Separation from the Eurozone would cause a banking crisis and another deep recession. To pay public sector workers and civil servants, Greece would have to revert back to its native currency. A series of capital controls - such as limiting bank withdrawals - may also be implemented to prevent banking and financial institutions from collapsing. Import prices will also increase, leading to poorer standards of living for Greeks. Those with debts to pay back within the Eurozone will also be hit hard, as a new Greek currency will have a value much less than the euro.

The effects of a Grexit aren’t just limited to Greece. The rest of the Eurozone could pay a price too. Investor confidence will undoubtedly take a hit should Greece split from the euro. Many might be tempted to pull money from other economically vulnerable European countries. The rest of the Eurozone will also need to decide how the outstanding debt from Greece will be paid for. Having said that, European politicians and economists have stated that they believe that the Eurozone would be resilient to a Grexit, as many European banks have tapered their exposure to Greece in recent years.

In these circumstances, it’s likely that the euro would test back to and through recent lows of €1.0460 against the US dollar, perhaps even breaking the €1.00 mark.

No deal, but still in the Euro (for now)

To avoid the uncertainty that a Grexit will bring, it’s possible that both parties could extend their negotiations beyond their original deadlines to try and find a resolution. However, this is only a temporary solution to a complex problem. Considering recent negotiations, it seems unlikely that either party will compromise on its demands, including deadlines.   

Darren Sinden
Market Research Director
Admiral Markets

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