Greece: Time to say good-bye?

Today is D-day for Greece, either the Eurogroup agrees to Greece’s request to a 6-month extension to its bailout that expires next week, or it says no. If the answer is no then Greece will have no access to European funding and will at risk from bankruptcy and leaving the Eurozone.

The prospect of a Grexit has been bandied about this week, but as we progress through the London session on Friday it is becoming more of a possibility. A few interesting developments have happened this morning:

1, The Eurogroup finance ministers meeting has been pushed back. The head of the Eurogroup, Jeroen Dijsselbloem, will release a statement at 2pm London time. The meeting will now start at 3.30pm London time, with a statement to come later, potentially after the NY close at 2200 GMT.

2,The Maltese finance minister said that the “German-led” bloc in the Eurozone is willing to let Greece leave the Eurozone. A German paper also said that the ECB is running contingency scenarios for a Greek exit.

3, Greece has a movable public holiday scheduled for this Monday – 23rd February – which could give the Greek central bank time to print drachma…

This situation remains changeable, but we do expect a binary outcome from this meeting – either Greece gets its money and stays in the Eurozone, or it doesn’t and it leaves. We would want to hear from the main players – Dijsselbloem, German officials or Greece – before we accept that Germany is willing to cut Greece out. However, Germany’s unwillingness to consider Greece’s last minute bailout proposal on Thursday suggested to us that Berlin could be willing to let Greece leave rather than negotiate a new deal that would cost political capital with German taxpayers.

As we have said before, although a Grexit would unleash a wave of uncertainty into the market, now could be as good a time as any to cut Greece loose, because:

1, The ECB has embarked on QE, which could protect the rest of the currency bloc from excess volatility in the event of a Grexit.

2, Contagion has been limited so far: even though Greece’s position within the currency bloc is probably the most vulnerable it has ever been, other peripheral nations have been unaffected. Spanish and Italian bond yields continue to trend near their lowest ever levels.

3, Growth: the latest PMI data, released earlier on Friday, showed the service sector in the Eurozone is picking up strongly, particularly in France and Germany, which helped to push the Eurozone’s composite PMI for January back to its highest level since mid 2014.

As we lead up to the Eurogroup meeting, a couple of potential scenarios to ponder:

No deal for Greece – the can is kicked down the road again: this could trigger a small sell-off in the EUR and in European stocks, but the market would most likely focus on the next deadline.

No deal for Greece – Grexit on the cards: This would be the most risk averse announcement, we could see EURUSD tumble below 1.10 and move back towards parity. Stocks may also sell off sharply.

Greece secures a bailout extension: This is the most risk positive outcome. We would expect to see the EUR and European stocks to rally. Greek assets could also outperform.

Overall, the Greek situation remains changeable, and the outcome of today’s Eurogroup meeting will be pivotal. Interestingly, EURUSD is still moving in a relatively tight range ahead of the meeting, however, volatility in EURUSD has started to pick-up, although it remains below the January high. We think that the market may be too complacent about the risks of a Grexit in the coming days, and there is a chance that volatility could jump, so make sure that you are prepared.

Takeaway:

• Friday’s Eurogroup meeting is make or break for Greece.

• There are signs that Germany would be ok with a Grexit, and the ECB is making contingency arrangements.

• Is this such a bad time for a Grexit?

• The market could be under-pricing the prospect of Grexit, EURUSD volatility remains below its January peak.