US – Lower unemployment, but no wage increase

Greece – the aid program expires; referendum on Sunday, with a “yes” to aid package with conditions slightly favored

Greece – IMF identifies additional financing needs of EUR 50 bn.

US – Lower unemployment, but no wage increase

Greece – aid program expires; government imposes capital controls and schedules referendum

In recent days, events in Greece have come thick and fast. First the Greek government suspended negotiations with its creditors on Saturday and decided to schedule a referendum for Sunday, 05. July. After months of tough negotiations, the Tsipras government has realized that the creditors aren't prepared to back down on their demands prior to providing additional aid. However, since these demands are in conflict with the election promises of Tsipras' party Syriza, the Greek population is now called upon to decide for itself if a continuation of the aid program under new conditions should be implemented or not. The problem with this is that the up until now extended aid program, after often frantic attempts to reach a “last minute” agreement at the beginning of this week, has irrevocably expired at midnight on Tuesday. As a result, the offer made by the creditors which Tsipras wants his compatriots to vote on this Sunday, is strictly speaking no longer valid. Concurrently with the expiration of the aid program, Greece has also for the first time failed to repay a loan installment in the amount of EUR 1.5 bn. due to the IMF. The consequence of this is that the IMF can no longer make fresh aid available to Greece unless this loan tranche is paid back.

After the Greek government had suspended the negotiations on Saturday, the ECB council decided on Sunday to no longer expand the size of emergency liquidity assistance (ELA) to Greek banks (EUR 89 bn.). In order not to endanger the solvency of Greek banks, the Greek government has thereupon introduced capital controls on Monday (29.06). Cash withdrawals are initially restricted to EUR 60 per day and transfers abroad are likewise subject to restrictions. For the Greek population and economy this is a very painful step. According to press reports, the supply situation is becoming tighter day after day, as it has become difficult for companies to keep up the ongoing flow of vital import goods (especially staple food items, as well as packaging materials) in light of the capital controls. In view of this precarious situation, Greece not only urgently requires a rapid decision for or against the euro and Europe, but also a sustainable solution.

What is going to happen next? Although Greek constitutional experts have considerable doubts about the legality of the referendum (today Greece's supreme court is to deliver a ruling on this), the European partners want to wait for the outcome of the referendum on Sunday. The government recommends that citizens should vote “no” in the referendum, i.e., against a continuation of the aid program under the proposed conditions. Against this, large associations such as e.g. representatives of the Greek tourism sector, have recommended that Greek citizens should vote for an extension of the aid program. The Orthodox Church, as a moral authority, also recommends to the faithful to vote for an extension. As the capital controls continue, recent surveys are beginning to show the “yes” vote gaining momentum. Should a majority of the Greek population vote against the package, this would likely mean the end of Greece's membership in the European Union and the euro zone, as the creditors won't back down from the main features of their conditions. Greece would then be forced to gradually switch toward a currency of its own. Apart from the fact that there are formal ambiguities, such a switch would certainly not be simple and couldn't be implemented overnight. Such an undertaking would be unlikely to take place in an orderly manner in view of the already tense situation. Moreover, the mountain of debt denominated in euro would remain payable and before Greece could hope to return to the capital markets, it would have to deal with servicing this legacy burden.

If a “yes” vote is obtained, it could lead to prime minister Tsipras stepping down (however, he has most recently revised this again). Since currently no valid offer by the European partners to Greece exists, Tsipras couldn't - prior to a possible resignation (which has already been demanded by the President of the European parliament via the media as well) - quickly sign a new aid program and thereby bring it into force. This would in our opinion however be necessary, in order for the ECB to approve the urgently needed expansion of ELA to Greek banks, so as to enable the removal of capital controls. Before a new aid program can begin, a Greek government capable of acting has to file an appropriate application with the ESM and subsequently conduct what are certain to be difficult negotiations. However, should there be new elections, it would probably take several weeks before Greece once again has a government capable of acting. In our opinion, the Greek economy cannot possibly be sustained under current circumstances. It is thus thinkable that the Greek president nominates a transitional government next week (if this is legally possible) which agrees to a very short term emergency/ bridging program with Europe (of 2 to 3 months duration) in keeping with the result of the referendum. Such an emergency/ bridging program however is only sensible if it creates a sufficient basis for the ECB council to expand emergency liquidity assistance to Greek banks. Should all short term efforts in the course of next week fail, the European partners would in our opinion have to mobilize rapid and comprehensive humanitarian help for Greece, in order to prevent a total catastrophe.

IMF identifies additional financing needs of EUR 50 bn. until 2018

The basic problem would however remain unresolved. Before a longerlasting aid program under the umbrella of the ESM could be implemented, there would undoubtedly once again be drawn out and difficult negotiations between Europe and Greece. The ESM's own requirements for a new aid program could turn out to be a sticking point. This is so because before the ESM can make funding available, the European Commission together with the ECB (if appropriate and possible, augmented by the IMF) has to evaluate whether the public debt of the country concerned is actually sustainable. In this context, the IMF has released a recent analysis of Greece's debt sustainability. In the framework of this analysis, the IMF has in light of the significantly weaker than previously expected environment (slower growth, lower surpluses) identified a funding requirement of EUR 50 bn. for the time period October 2015 to year-end 2018. The IMF was highly critical with respect to Greece's debt sustainability without additional concessions by the European partners. Greece's indebtedness would remain high for decades, and would be highly susceptible to all kinds of shocks. An option that would improve the debt profile in the eyes of the IMF would be a maturity extension of bilateral loans to 40 years, as well as a further stretching of the interest payment deferral to 20 years. With that the IMF makes quite clear that any additional concessions to Greece in the framework of the new aid package (fewer reforms, lower budget surpluses) presuppose that the European partners are prepared to agree to a further stretching of maturities, or even an actual debt haircut. We regard the stretching debt maturities as well as a further deferment of interest payments on the part of the European partners as a realistic possibility that should be politically palatable as well. However, we don't believe that the European partners would under any circumstances agree to an actual debt haircut. However, after the two aid programs to date haven't achieved the desired results, the Greek government and the European partners have to seriously consider (if an agreement is reached) how the time until 2018 can be used most effectively in order to generate long term sustainable and sound economic structures in Greece, which allow the country to once again access the capital markets.

US - Labor market data: positive development, but no pressure on Fed to act

In total, the June labor data showed a continuation of the positive trend. The unemployment rate declined to 5.3%, reaching a new low since the outbreak of the crisis in September 2008. Non-farm payroll gains were reported at 223,000, lower than in the previous month, but still above this year’s average. Average hourly earnings stagnated compared to the previous month and were thus a disappointment. Higher wage growth would be a prerequisite for increased inflationary risk and thus the release did not put any immediate pressure on the Fed to act and raise interest rates. At the same time, the recent released data set also showed that the participation rate declined. This is yet another confirmation that the increased demand for labor will not be met by entrants. Rather, it will have to be satisfied mainly from the existing pool. This means that, with employment increasing, the labor market is set to become ever-tighter, which will ultimately result in upward pressure on wages. Given the extremely low interest rate level and lagging impact of monetary policy decisions, the Fed must base its decisions on long-term considerations. That is why we think the Fed should act fairly soon and expect the first hike in September.