Markets rose strongly for a second day as hopes of a fresh deal between Greece and its creditors buoyed risk appetite. At long last, progress seems to be made as negotiations, after being stuck in months of stalemate, have gathered real pace since yesterday. Athens put forward fresh economic reforms on Monday, which saw structural changes to the retirement age and pensions savings, relying on increased employment contributions, as well as notable tax reforms which would target corporate profits. However, the proposal seemingly arrived too late for a comprehensive review and monitors would require more time to assess and finalise terms. After yesterday’s substantial rally in global equity markets, particularly the 9% rally in the ASE general index it seems the mood is steadily improving and investors were on the whole optimistic that a deal could be struck soon.
However, backlash to the plan proposed by Athens was nowhere more vocal than at home as Greek officials reacted with hostility to the concessions offered in return for the release of emergency bailout funds. It seems you can’t please everyone with tax increases, reforms to state pensions and healthcare contributions all proving a bitter pill to swallow for the majority of left leaning Syriza members. The euro, after experiencing a particularly erratic month against the dollar sold off sharply today, losing as much as 1.6% against the greenback as the focus switched back towards fundamentals and away from short term sentiment. With a deal within touching distance currency traders trained their attention back towards the possibility of a September rates rise in the US and with the ECB firmly committed to its QE programme the euro plunged towards 1.1135 against the dollar.
We’re far from out of the woods yet, and investors were reminded of this earlier today after the ECB stepped up its support to Greek banks, increasing the limit on emergency liquidity assistance to approximately €89bn as Greek savers continued to withdraw funds from local banks at an alarming rate. While figures for household and business deposits held at Greek banks is only updated until April, the -17% y/y withdrawal rate is disturbingly high and builds on double digit declines in both February and March. As the situation escalated throughout May and June we do not expect this withdrawal rate to slow in these respective month’s statistics but while the overall picture points towards an incoming Greek deal investors must exercise caution as any agreement could merely kick the can down the road.