Tags: Grexit | Federal Reserve | ECB | Euro Group

Euro Stumbles Over Faltering Greek Debt Talks

By    |   Monday, 15 Jun 2015 08:16 AM

With the Federal Reserve meeting for two days this week and not expected to raise interest rates, market attention was focused on the related issues of central bank policy and the management of the Greek debt crisis as they affect financial markets.

In the first clip, Laura Fitzsimmons, VP at JP Morgan Investment Bank, told CNBC that short traders were “reloading” as Greek debt talks drag on, which she said, “makes sense, because we’re going to see more negative headlines this week, obviously we’ve had quite a few already to start the week.”

She pointed to a Euro Group meeting scheduled for Thursday and a possible move by the ECB to take short-term measures related to Greece.

Over the rest of the year Fitzsimmons expects the euro to weaken toward the 103 area.

She would choose sterling rather than the dollar to short the euro against, because she thinks the dollar is overly influenced by the issue of Fed policy.

Also, Fitzsimmons estimates the probability of a Grexit at less than 50 percent and isn’t worried about it, because she sees Greek bonds as in “safe hands.”

This writer suspects that the market is banking on continued Fed support.

Brendan Brown, Head of Economic Research at Mitsubishi UFJ Securities International, minimizes the likelihood of a Brexit despite the fact that the re-elected Cameron government has promised a referendum, because this would be disruptive to the UK itself.

Cameron would have little to gain and little leverage in negotiations with Europe, so “they don’t take Britain’s negotiating position very seriously.”

Brown would focus instead on “the really big story of the potential Greek debt moratorium.” He sees the Greeks as having “quite a strong card to play.

The amount of debt outstanding to the ECB, which has been lending to the Greek banks, is now over 100 billion euros ($112.19 billion), maybe 150 billion euros ($168.30 billion). Any sort of question about the repayment of that throws a big crisis into the whole EU and ECB workings.”

Brown went on to criticize the ECB and the Germans for being “amazingly reluctant to come up front and offer any sort of debt write-off.” Brown stressed that only a write-off would provide an incentive for Greece to adopt “painful reforms.”

However, Brown minimized the consequences for all but “the official holders in the EU and IMF.”

He warned that the political consequences are “deadly serious” for ECB Chief Draghi, who “really looks a lame duck and in many ways incredible,” and the position of the Merkel government “looks really tenuous.”

This could affect the debts of peripheral countries as well, and could cause “a wave of selling against high-yield credits generally.”

Brown further predicts a 25 bp hike by the Fed any time after this meeting, and he asserts that the Fed is “very concerned” about “financial instability and an overpriced equity market and overpriced credit markets.”

This writer would add that the Fed itself created these conditions through its bailout of the TBTF banks in 2008 and afterward.

We close with the views of two analysts as to when the Fed will raise rates. The first, by Vasu Menon, of Wealth Management Singapore, reflects the consensus view that it will occur in September, based on tighter labor markets.

The second, by Steve Goldman, of Kapstream Capital, is that it will be “a 2016 event.” This writer has questioned all along that the Fed will ever raise rates and that the Fed can manage it smoothly.

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Robert-Feinberg
With the Federal Reserve meeting for two days this week and not expected to raise interest rates, market attention was focused on the related issues of central bank policy and the management of the Greek debt crisis as they affect financial markets.
Grexit, Federal Reserve, ECB, Euro Group
583
2015-16-15
Monday, 15 Jun 2015 08:16 AM
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