Greece - Capital markets focus next week

Greece - Capital markets focus next week

Eurozone – Publication of PMI survey data

Greece: Extension of deadline currently most likely scenario

Greece will be the focus of capital markets next week. At the beginning of the week, the Greek government has to meet a deadline to provide a list with reform measures that meet the requirements of the institutions (European Commission, ECB, IMF), i.e. its creditors. Ideally, this list, after being approved by the institutions, would be forwarded to the meeting of Eurogroup finance ministers for a vote on April 24. This would release financing to Greece, which is currently held back. However, the current news flow does not point to such an outcome. Negotiations between Greece and its creditors seem once again not to be proceeding as envisioned. Markets have already prepared to some degree for a failure, with German yields declining and government yields in Italy, Spain and Portugal rising, alongside (of course) Greece. In the - surprising - event that Greece would come to terms with its creditors next week, these bonds would mirror the relief to the greatest extent.
However, risks are higher that this deadline will also not be met. While the exact amount of liquidity buffers that the Greek government can access are not known, shortages could emerge as early as at the beginning of May. This is especially so, as IMF President Lagarde stated that she would not support a payment delay if asked for one by Greece. Greece has payments coming due to the IMF in the amount of EUR 195mn on May 1 and EUR 745mn on May 12. In addition, regular pension and wage payments have to be met at the end of April. We think that it will be decisive for markets how far the negotiating positions remain apart next week and if an extension of the deadline is granted. A recent statement by the Greek prime minister points in this direction. Tsipras said that he was optimistic that negotiations could come to a successful conclusion by the end of the month, i.e. one week after the Eurogroup’s meeting next Friday. In our view, an extension of the deadline seems the most likely outcome next week. In this case, markets would continue to prepare for a Greek default and German government bonds would remain well supported, while yields of the other countries mentioned above should continue to rise.

Eurozone – Publication of PMI survey data on Thursday

This coming Thursday, the EMI flash survey data for April will be in focus.
This will be the first major data point regarding the economic development of the Eurozone in 2Q15. Thus far, main indicators point to continued stable growth of the Eurozone economy, and we expect growth of around 1.1% y/y in 1Q15 (after 0.9% y/y in 4Q14). In general, the market is currently watching France and Italy closely, since growth disappointed in 2014 in these countries. However, especially in Italy, leading indicators for the time being are very promising, thus indicating growth contributions from Italy and France for 1Q15. This would signal that the economic recovery of the Eurozone is broadening.