Greek confidence vote to send EUR higher.
More work to do on private investor participation to convince investors, ratings agencies.
US existing home sales likely to highlight the weak US housing sector, keeping UST yields below 3%.
After a short break, Athenian democracy once again takes the global centre stage. The Greek parliament will conclude a three day debate with a vote of confidence in the reshuffled cabinet at midnight. This crucial vote is likely to determine not only the fate of the Greek government, but indeed the fate of the Greek bailout package and by extension the fate of financial markets around the globe. Our view is that the government passes this test, perhaps with the help of a few independents and minor parties. This then sets up the debate and vote on the budget next week. While rejection of the budget at that stage cannot be ruled out, it would seem perverse for MPs to vote in favour of the new cabinet today only to vote down the most important piece of legislation associated with that same cabinet a week later. Passage of the new austerity budget opens the way for the approval of the next tranche of aid at a special EcoFin on July 3; and assuming the details of private investor participation can be worked out in time, a new Greece bailout package could be ready by July 11. Contrast this rosy scenario with the uncertainty that would follow a failure of the confidence vote: an election that eventually produces a fragmented parliament, at best resulting in a significant delay in approving a package; and at worst risking descent into chaos and disorderly default.
On other news in the Eurozone, the FT reports that German banks are looking for incentives to participate in any rollover of Greek debt holdings. Indeed, such incentives may prove essential to convincing the ratings agencies to hold off on further downgrades: Fitch today said that even a voluntary rollover of Greek bonds would be considered a default. Meanwhile, in more positive news, albeit with a much longer time horizon, yesterday’s EcoFin decided that the ESM – the post-2013 bailout fund – will not enjoy preferred creditor status in the cases of Greece, Ireland and Portugal. This should relieve some of the pressure on spreads: the concern had been that neither Ireland nor Portugal would be able to access private capital in the future while those investors were subordinate to ESM loans.
On balance, we remain optimistic on Greece’s bailout prospects, and favour a broad rebound in the EUR over the coming weeks; for tonight there is potential for a significant rebound on a stronger-than-expected vote of confidence. Initial targets would be 1.4500 in EURUSD; and 1.23 in EURCHF.
Ahead of the vote, the German ZEW survey is expected to decline with the expectations component falling into negative territory, but reactions should be limited. In the UK, public sector net borrowing data is expected to show an increase for May from the previous month. This may prove to be negative for GBP as fiscal austerity has helped the UK maintain its credibility. Amid expectations of a dovish BoE, an improvement in the overall risk environment can see GBPAUD back towards the lows of 1.5042.
US existing home sales are expected to decline significantly in May due to the plunge in the number of contracts in April. While the US housing market remains the Achilles heel of the US economy, negative housing numbers should continue to weigh on USD as well as US Treasury yields, keeping US Treasury yields below the 3% and USDJPY around the 80.00 level.
BNP Paribas
Corporate & Investment Banking