LONDON (Reuters) – The coming week will go a long way to dictating whether Greece remains in the eurozone.
A meeting of eurozone finance ministers on Monday is tasked with producing a deal that will keep Greece solvent and which is acceptable to both sides.
A similar meeting last week, marking Greek finance chief Yanis Varoufakis’ debut, got nowhere over seven hours of talks.
Some of this is down to semantics – the Greeks will not accept an extension of the hated bailout programme while bridging financing sounds fine – but there are serious issues of substance too and there is a gulf to overcome.
The new government’s plan to renegotiate Greece’s debt pile and end debt-cutting will not fly given the amount of money Athens owes to European institutions and governments.
There is economic logic in easing up on austerity to galvanise growth and increase the tax take. The eurozone could move a little in that direction but Prime Minister Alexis Tsipras is likely to have to move considerably further from where he is now.
Tsipras says he has a strong democratic mandate to pursue a new deal. The eurozone says Greece owes them a fortune. Both are right. Something must give.
The European Central Bank has kept the pressure on and could possibly pull the plug on emergency support for Greek banks, without which they will collapse, if there is no progress towards a deal.
Last week, the ECB made available a further 5 billion euros of Emergency Lending Assistance (ELA). Banking sources told Reuters it did so because deposit outflows have picked up and also to ensure sufficient liquidity while the standoff persists.
That money will only last until Wednesday when the ECB Governing Council meets to review the situation.
It could stop the lifeline for Greek banks if Greece was clearly not in a bailout programme and/or if it judged its banks to be insolvent. That would push Athens a big step closer to the edge.
“A continuation of the deadlock on Monday will immediately shift focus to Wednesday’s bi-weekly ECB review of the ELA limits of Greek banks,” said Deutsche Bank strategist George Saravelos.
“In the event of failure, we would expect the ECB to become more explicit on the timing of when ELA funding would be withdrawn or capped.”
The odds are still on some sort of extension to the bailout, even if it is called something else, to allow time for more substantive negotiations. But it is far from guaranteed.
The Dutch finance minister who will chair Monday’s meeting of the Eurogroup played down the chances of a breakthrough.
“I’m really still very pessimistic about that now,” Jeroen Dijsselbloem said on Friday.
Economists polled by Reuters estimated a one-in-four chance of Greece leaving the 19-nation single currency area this year – the highest reading since the start of the Greek debt crisis in late 2009.
“Ultimately, the alternative of ELA withdrawal and eventual capital controls for Greece is worse for all sides involved. But whether progress can be achieved under very pressing deadlines and large differences of opinion on the underlying policy path between the two sides remains to be seen,” Saravelos said.
Greece will cast a long shadow this week but there are other key events besides. Top of the list is the minutes of the Federal Reserve’s last policy meeting.
The central bank world has been upended by cheap oil and the prospect of the European Central Bank creating more than 1 trillion euros over the next 18 months.
Interest rates have been cut from Australia to India to Canada. Denmark and Sweden now boast negative official rates and the latter has started printing money.
In stark contrast, the Fed is expected to raise rates at some point this year. At its last meeting, it said it would remain patient about a first policy tightening but said the US economy was expanding “at a solid pace” with strong job gains.
The Bank of Japan delivers its latest policy decision on Wednesday.
In April 2013, the BoJ pledged to push inflation up to 2 per cent in “about two years” by printing money at an unprecedented rate to end two decades of deflation.
With inflation running at just 0.5 per cent, more stimulus is expected but not yet. Of 16 analysts polled by Reuters, five each said more BoJ easing would come at either its July or Oct 30 meeting.