Don’t think twice, it’s all right
Posted on 19 June 2015
"Here the Greek government will likely be presented with a “take it or leave it” Service Level Agreement..."
“When your rooster crows at the break of dawn. Look out your window and I’ll be gone. You’re the reason I’m trav’lin’ on. Don’t think twice, it’s all right.” – (Bob Dylan)
European equities remain attractive
Both Greece and her creditors may well see themselves as the victim in Bob Dylan’s famously world weary ode to the breakup. Where ever the fault lies, at the time of writing, the prospects of a deal to tide Greece over until negotiations for the next bail out begin seem increasingly remote. Even so, we continue to believe that clients will be well served over the next 6 – 12 months by placing some of their investment faith in both continental European stocks and their US counterparts. We explore the reasons for this continuing stance in more detail below.
What is going on?
Fears that Greece and her creditors are going to fail to reach the deal necessary to get them to negotiations for the third Greek bailout in time have grown over the last week amidst increasingly acrimonious comments from both sides of the negotiating table. Capital markets outside of Greece have remained eerily calm in the face of this uncertainty; however we suspect that this may not remain the case in the event the two sides fail to reach an agreement imminently.
How much time do they have to reach an agreement?
It’s hard to be precise on this, but within this calculation is the need to factor in some of the institutional constraints on the Euro group side. In order to extend the current bailout, Euro group parliaments will need roughly one working week. It is then a matter of looking at the upcoming repayment schedule for the Greek government and deciding when those repayments will likely become too onerous to meet. In terms of the schedule, you have the rolled up IMF payment of €1.6bn at the end of June, Treasury bill repayments on 10th and 17th July and then two bonds totalling €3.5bn due to the ECB on the 20th July. For many, it is the ECB repayment that represents the likely hard deadline, based on the assumption that the Greek government may just about be able to cobble together sufficient resources to meet both the rolled up IMF repayment and the Treasury bills due in July.
However, our necessarily more conservative assumption is that the Greek government will be unable to make the first hurdle, the rolled up IMF payment, preferring instead to use any available funds to pay domestic pensions and wages. Based on this assumption, and adding in the week necessary to allow for those aforementioned institutional constraints in the Euro area, Monday looks a likely deadline for a deal to be struck between Greece and her creditors.
Rumours that an extraordinary summit of the heads of state would be called in a last ditch attempt to get Greece to agree to a deal have materialised, with this meet now seemingly scheduled for Monday. Here the Greek government will likely be presented with a “take it or leave it” Service Level Agreement (SLA) by the institutions. This SLA will likely look substantially similar to the proposals drawn up by the institutions a week ago.
Most still agree that Greek Prime Minister, Alexis Tsipras, is still eager to cut a deal, in spite of some of his domestic posturing. Domestic support for Euro area membership remains strong according to the latest polls and Mr Tsipras reportedly has understandable concerns about the economic and political ramifications of having to install capital controls in the absence of such a deal. This still suggests to us that it is just about more likely than not that we will see agreement, potentially late on Monday or in the early hours of Tuesday morning.
William Hobbs, Head of Equity Strategy, Europe