Market commentary: Greece - one step forward, two steps back

The widespread optimism surrounding Greece and the progress towards a definitive bailout agreement displayed by officials on Tuesday and embraced by markets at the beginning of the week seems to have been misplaced.

On Wednesday afternoon, shortly after formal talks between Greece and its international creditors resumed, the negotiations hit another major road block, with the Greek proposal being rejected as it was deemed unlikely to be enforced. It has emerged that the proposal submitted by Greek Prime Minister Alexis Tsipras, while representing a significant step towards the requests advanced by Greece’s creditors, did mainly relied on taxes increases rather than on spending cuts and reforms of the public sector and the country’s costly welfare system.

Officials from the IMF, the ECB and the European Union expressed widespread skepticism on the real ability of Greece to implement further taxes hikes and to efficiently and effectively collect the amounts due. The reality is that the Greek government in power over the past five years have already and repeatedly asked for more money on the sole promise of increasing tax revenues that has, so far, proved false and unattainable.

While personally in agreement with this view, I believe that IMF’s Director Lagarde’s quote reported by Reuters “you [Greece] can’t build a programme just on the promise of improved tax collection, as we have heard for the past five years with very little result”, sums up the thoughts shared by the majority of the creditors and officials involved in the negotiations.

A counter proposal with a new set of measures has been presented to the Greek government by the country’s international creditors, however Prime Minister Alexis Tsipras is facing increasing opposition from his own party not to concede too much on pivotal issues such as pensions, public salaries and government spending.

Last night's negotiations were postponed to today with the two sides still quite far apart. Today a technical meeting was schedule for 6.00am to try to bridge some of the differences between the two parties before a formal meeting between the Greek delegation and Greece’s creditors is going to take place in the afternoon.

With most of the progress achieved earlier this week in jeopardy, the Greek Prime Minister has somewhat escalated the tones of the ongoing negotiations, expressing incredulity for the unexpected rejection of his proposal and stating that the current impasse was caused either by the unwillingness of the institutions involved to streak a deal, or by the pursuit of special interests working against the resolution of the Greek crisis.

Markets quickly responded to the latest negative developments, with the Athens Stock Exchange Index dropping as much as 4.65% throughout last trading session, before partially recovering and closing -2.5% on the day. European equities also corrected with the Euro Stoxx 600 Index closing 1.10% lower on Wednesday and opening lower this morning, before turning positive during early trading.

The German Dax Index also dropped 1.31% yesterday, although it is trading in positive territory this morning pairing some of the losses caused by the negative news. US markets closed in the red, dragging down Asian stocks that posted sizable daily losses as the Nikkei 225 declined 0.46%, the Hang Seng shed 0.96% and the Shanghai Composite Index lost as much as 3.46%.

European Sovereign bonds also reacted, with price on peripheral papers such as Italy, Spain and Portugal declining and pushing yields higher.

With the hard stance taken by its creditors, particularly the IMF, and the increasing pressure from the Greek anti-austerity Syriza party not to compromise on key welfare issues, it seems like a resolving agreement is not on the horizon yet, meanwhile Greece is desperately running out of money and time to refinance its maturing loans.

This article was issued by Paolo Zonno, Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.