Greek debt talks fail, market tensed but unmoved

The talks between the Greece and European creditors have come to an end abruptly before time in Brussels yesterday, and the reaction from the euro was a mute one, as we expected in one of our last publication.

The Euro is trading around 1.135 against the dollar this morning, trading within its tight range of 200 pips of 1.127 & 1.147. We expect the range trade to continue in the Euro.

 Nervousness was seen over the stock and bond market. E.Stxx 50 dropped more than 1%, currently trading at 3402. Greek benchmark 10 year bond yield trading at 900 basis points above its German counterpart. Athens stock exchange at 859 has dropped more than 3.5% for the day and down more than 25% since September 2014.

a)     It pays off to look into the talks in a greater details and find out where the red lines are-

• European Creditors - The creditors are asking Greece to follow a programme of austerity and asking it for an extension of the current bailout programme extending 6 months until they come out with a new one. The red line is no debt write-off and an aid programme with conditionality attached.

• Greek Government - Greek government is not ready to accept any deal of austerity and extension of the current programme until a new agreement comes up in 6 months timeframe. Instead they are looking for a bridge agreement, finances without conditionality; borrow through short term treasury beyond the currently agreed 15 billion. The red line is no austerity beyond the 70% of the previous agreement for time being.

b)    Important timelines- 

• Greece current programme expires after February 28, 2015; German finance mister has suggested if no deal is reached before Friday it will be considered expired. 

• ECB governing council will meet on Wednesday, 18^th February to decide on its emergency lending assistance (ELA) to Greece which currently stands at €65 billion. 

• If Greece programme expires next month with no deal at sight, Greece can run out of money as early as end of May, 2015 or earlier if bank run accelerates or tax revenue dries more. 

We expect Euro to continue range trade against the dollar, moving based on headlines. Any major movement will only come from major political move towards Grexit or long term agreement on the positive side.