Yesterday, Greece brought a new proposal to the finance ministers of the Eurozone, one that stops early retirement, raises the retirement age by two years, introduces additional business and wealth taxes, and reforms the VAT system, all without violating the lines set by Syriza. The stock markets saw it as a light at the end of a long tunnel in danger of collapse. Both European and Greece markets enjoyed upward movement on the announcement, as it suggests the threat of Greece walking out of the Union and causing financial contagion across the Eurozone have decreased. However, it remains important to keep in mind that the troika requires €1.6 billion by June 30th and a default, as followers of this topic are aware of, could cause bank runs and failure of capital controls.
Truly, the next week will truly show if Greece is willing to perform everything to the letter.
As a result of the proposal, the FTSEurofirst 300 index closed +2.4%, Euro STOXX 50 closed with +4.1%, and in Greece, the local stock exchange rose +9% while local banks soared 20.8%. The markets have taken it as a sign the Greeks have been pushed into a corner and will now shoulder their responsibilities.
The politicians, however, do not share the market's glowing optimism. German Chancellor Merkel said there was no basis for a decision at the emergency summit, while French President Hollande, though more upbeat towards the Greek proposal, still admitted not everything has been resolved and he hoped it could pave the way for a deal. Hans-Peter Friedrich, deputy parliamentary floor leader for Merkel's conservatives, relayed skepticism on Greece's ability to assure Germany enough to win support for more aid. "[There was no point in] dragging out a bankruptcy for political reasons," he said. "We do the greatest harm to Europe if we lie to ourselves."
Followers of the EU crisis should already be aware this fiasco would have three outcomes: Grexit, can-kicking, or a breakthrough. Should the new proposal fall through rather than leading to more improvements in the talks, the Greek central bank warned the troika to prepare for a "difficult day" on Tuesday. Can-kicking may ensue, resulting in political contagion for Portugal, Spain, and Italy. A Grexit, on the other hand, would lead to both increased borrowing costs from the aforementioned three nations and increased scrutiny by the financial markets.
So how does this relate to energy?
Although another bout of economic trouble from political contagion or a Grexit could affect oil demand from the southern Eurozone countries, for now our main focal point is currency movements. Last week, the perceived increase in the risk of a Greek default lifted the US dollar as it depreciated the Euro and lowered oil prices consequently. And after Greece came out with the new proposal yesterday, oil prices went up as the Euro appreciated. We note that gasoline futures fell slightly by more than 1%, and some energy analysts on Wall Street are expecting the near-term environment to be bearish, which could negatively impact the refiners currently enjoying large gains from the lower costs of production, as it may reduce revenues a little bit.
Considering how much the can has been kicked in the past, how the powers-that-be directing the European Union are politically interested in keeping the member-states together under one roof, and how the Greek people do not want to submit to the austerity measures, we do not share the optimistic sentiments of the market and expect another impasse next week followed by more can-kicking.
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