A short summary of today's developments
- ECB maintained ELA funding – collateral haircuts increased. The size of the haircuts is not disclosed, but media reports suggest it is not possible to increase ELA further as haircuts match the total pool of collateral in Greek banks.
- The message from Merkel/Hollande meeting yesterday was that it is up to Greece to deliver a proposal for a new programme.
- According to sources in Brussels, 16 of the other 18 countries in the euro area are in favour of Grexit (France and Cyprus said to be in favour).
- Ahead of today’s Eurogroup meeting, Tsipras should have requested EUR7bn bridge loan within 48 hours, but he came to the meeting without proposals.
- Dijsselbloem emphasized that the Eurogroup is willing “to do whatever it takes” to limit contagion. Following the Eurogroup meeting he said, he will ask the Institutions to look at the situation in Greece after which the Eurogroup will see whether negotiations can formally start.
- The EU leader Summit is set to begin 18.30 CET (delayed half an hour). There will be an Eurogroup conference call tomorrow.
- Greece has a EUR1.25bn auction in 6M bills that could attract attention tomorrow. Greece has so far been able to roll bills and with redemptions coming up Friday it is crucial that Greece can avoid a failed auction.
Market reaction
- Across euro FI markets the yield curves bull flattened with German 30y yields down 16bp to 1.41%. The curve flattening was supported by a lower oil price trading below USD60/bl for the first time since mid-April.
- In spread terms the market movements were muted. Portugal was again the biggest loser with 8bp widening against 10Y Germany while the Spanish and Italian spreads ended the day little changed.
- EUR/USD declined below 1.10, which in our view reflects that there is no clear end-game in the Greek saga, in contrast to last week where the market saw the referendum as being the turning point. No news and no clear end-game imply a slow burner for the EUR. Falling volatility implies that the EUR is back as the funding currency of choice. Expect EUR/USD to grind lower with occasional spikes on headlines.
- Eurostoxx ended Day 2 down more than 2%.
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