Dollar Tumbles After Fed Whiffs Again; More Cracks Appear In Chinese Stock Bubble

All those saying the Fed will never be able to raise rate are looking particularly smug this morning, because if the market needed a green light that despite all the constant posturing, pomp and rhetoric, the US economy is simply (never) ready for a rate hike, it got it late last night when Goldman is pushing back its forecast for the first Fed rate hike from  September to December 2015 saying that “in large part this reflects the fact that seven FOMC participants are now projecting zero or one rate hike this year, a group that we believe includes Fed Chair Janet Yellen. We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, but the committee did not lay that groundwork today.”

This happened even as Citi did the reverse, and pulled forward its first rate hike estimate from December to September, citing “compelling” evidence that moderate growth may be sufficient to close output gap in medium term, because potential growth has slowed significantly since 2008. Citi is also concerned that buildup of financial imbalances may manifest in disruptive rate volatility, notwithstanding Fed communications to the contrary.

Judging by the reaction in the US Dollar (which is crashing) it is Goldman 1:Citi 0.

As for June, allow us to sumamrize: US economy is so strong the Fed once again contemplated a “barely noticeable” 25 bps hike… and whiffed. As for December, we give Goldman 3 months, or some time in September, when the Fed realizes the US economy will be covered in 6-12 inches of GDP crushing snow in December and as a result the rate hike will be delayed to some time in 2016. And so on. And so on. Because, well, here is a chart from 2010 from a CNN article titled “Economists: Fed won’t raise rates until 2012” which needs no comment.

End result of this latest risk repricing is that the USD tumbled overnight, as did bond yields for obvious reasons…  as did China, where the market plunged another 3.7% overnight on increasing chatter that the locals are realizing that the local stock bubble is, well, a bubble and nobody wants to be the last one in.

In central bank news Norway cuts rate to record low 1.00% as expected, while the SNB maintains deposit rate at -0.75%. So yes: Europe continues to ease further into NIRP territory and/or monetize debt, and people are talking about the Fed hiking rates.

A closer look at stocks, shows the European Eurostoxx50 -0.6% remaining on the back foot, as market participants continued to grapple with Greek debt saga, while EUR strength stemming from broad-based USD weakness in reaction to dovish FOMC weighed on exporters. Investment banks Citigroup brought forward their expectation for Fed rate hike from December to September, while Goldman Sachs hold converging views and pushed back the date of its first projected Fed rate hike from September to December. At the same time, supply from Spain and France (both auctioned at higher than prev. yield levels) failed to weigh on Bunds, which remained bid since the open, while Greek bond yields continued to climb and the benchmark Greek equity index fell to its lowest level since Sep’12.

Heading into the North American crossover, sources out of Greek press reported that the EU and ECB are drafting a possible debt relief statement on regards to Greece. (eKathimerini)

ECB are to increase their ELA ceiling to Greek institutions by EUR 1.1bln to EUR 84.1bln while leaving their haircuts on Greek debt unchanged, according to sources. (BBG) Of note, this decision comes as part of the ECB’s weekly review of the ELA limit for Greek banks as bailout talks continue.

Greek Finance Minister Varoufakis said it is unlikely that an agreement can be made at today’s Eurogroup meeting as it requires
approval at a higher level of government. However, did later state that Greece seeks to remain in the EU (RTRS)

ECB’s Weidmann said that the ECB will not be able to provide further financing to Greece if discussions fail. Elsewhere, German
finance minister Schaeuble stated that aid can only be provided if Greece adheres to its obligations adding that the IMF must continue Greek aid. (RTRS/Bild)

GBP/USD rallied to its highest level since Nov’14 and UK TWI rose to 7y high, supported by a weaker USD, the release of better than expected UK retail sales and also comments by BoE’s Forbes (soft hawk) who said she foresees an increase in interest rates in the “not too distant future” and that the central bank could lift rates before UK inflation reaches its 2% target. Commodity linked currencies benefited from the broad based commodity rally, with AUD/USD which moved above its 100DMA and the 50DMA levels, while USD/CAD fell to its lowest level since mid-May. Elsewhere, NZD slumped after NZ Q1 GDP fell to a 2-year low (Q/Q 0.2% vs. Exp. 0.6%, Prev. 0.8%, Rev. 0.7%) which prompted many to bring forward RBNZ rate cut expectations, with a July cut all but priced according to OIS.

Despite the risk averse sentiment, commodity complex posted broad based gains, with gold trading above the 50DMA and in close proximity to the 100DMA line, with the key psychological USD 1,200 level to follow. Whilst WTI and Brent crude futures remain bid and sit comfortably above the USD 60.00 and USD 64.00 handle respectively.

In summary: European shares pare losses, remain lower with the tech and autos sectors underperforming and basic resources, utilities outperforming. Merkel says a deal with Greece is still possible provided the Greek government follows through on the  economic-reform pledges made to creditors. ECB provides EU74b in TLTRO, estimated range EU20b-EU160b. U.K. retail sales  rise, analysts had expected a decline. Fed kept its forecast for  rates to begin rising this year and reduced its projection for where they’ll be by the end of 2016.  Norway cuts rate to record low, SNB maintains deposit rate at -0.75%. The Swiss and Swedish markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. Japanese 10yr bond yields fall; German yields decline. Commodities gain, with natural gas, soybeans underperforming and Brent crude outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, CPI, Bloomberg economic expectations,  Philadelphia Fed index, leading index, current account balance due later.

Market Wrap

• S&P 500 futures up 0.2% to 2094
• Stoxx 600 down 0.7% to 381.1
• US 10Yr yield down 4bps to 2.28%
• German 10Yr yield down 5bps to 0.76%
• MSCI Asia Pacific up 0.4% to 146.8
• Gold spot up 1% to $1197.9/oz
• Eurostoxx 50 -0.6%, FTSE 100 -0.3%, CAC 40 -0.7%, DAX -0.7%, IBEX -0.6%, FTSEMIB -0.4%, SMI -1.1%
• Asian stocks rise with the Sensex outperforming and the Shanghai Composite underperforming.
• MSCI Asia Pacific up 0.4% to 146.8
• Nikkei 225 down 1.1%, Hang Seng down 0.2%, Kospi up 0.3%, Shanghai Composite down 3.7%, ASX down 1.3%, Sensex up 1.1%
• 9 out of 10 sectors rise with health care, energy outperforming and telcos, financials underperforming
• Euro up 0.52% to $1.1396
• Dollar Index down 0.58% to 93.75
• Italian 10Yr yield down 3bps to 2.28%
• Spanish 10Yr yield down 6bps to 2.27%
• French 10Yr yield down 7bps to 1.17%
• S&P GSCI Index up 0.9% to 440.5
• Brent Futures up 1.5% to $64.9/bbl, WTI Futures up 1.4% to $60.7/bbl
• LME 3m Copper up 0.8% to $5789.5/MT
• LME 3m Nickel up 0.9% to $12860/MT
• Wheat futures up 0.3% to 498.5 USd/bu

Bulletin Headline Summary From Bloomberg and RanSquawk

• FOMC post-mortem takes centre stage, with USD weakness supporting EUR and GBP, as well as the broader commodity complex.
• Greek debt crisis uncertainty and firmer EUR weighed on exporters and sees EU stocks trade lower again, with the benchmark index in Greece trading at its lowest level since Sep’12.
• Going forward, market participants will get to digest the release of the latest US CPI, weekly jobs, Philadelphia Fed survey and the release of the latest EIA natural gas storage change report.
• Treasuries gain, with shorter maturities extending rally seen yesterday after Fed cut longer-term rate forecasts and as Greece remains at an impasse.
• Fed officials’ median forecast for fed funds target fell to to 1.625% for end-2016 from 1.875% March; it fell to 2.875% for end-2017 from 3.125% in March
• Merkel, in a speech to lawmakers in Berlin, said a deal with Greece is still possible provided the Greek government follows through on the economic-reform pledges made to  creditors
• EC, ECB are working on the draft of a possible statement on debt relief to be used if Greece, creditors reach an agreement, Kathimerini newspaper reports, without saying how it got the information
• Greek banks, which received two capital infusions in the past two years, may need a third one as a recession drives up losses from bad loans
• U.K. retail sales rose 0.2% in May, more than expected, led by sales of food and gasoline, as spending on clothing declined
• Hong Kong lawmakers rejected a China-backed plan for the city’s first leadership elections, a result that leaves both Chief Executive Leung Chun-ying and pro-democracy campaigners with little to show after months of protests
• Sovereign 10Y bond yields lower. Asian, European stocks slide, U.S. equity-index futures gain. Crude oil, copper, gold higher

DB’s Jim Reid completes the overnight recap

So all-in-all it was a fairly balanced set of minutes released by the FOMC and post-meeting statement from Yellen last night, one which keeps a 2015 and September lift-off in play, but also one which emphasized the need for any move to be gradual and clearly still data dependent. It was the dovish undertone in the dot plots which got most of the market talking however after we saw the 2016 and 2017 dot plot median forecasts revised down and a greater proportion of members signaling for just one hike this year, perhaps meaning that the likelihood of a move in September has slipped slightly. Rates markets certainly reflected a more dovish tone. Indeed having opened at 2.310%, 10y Treasury yields rose steadily over the course of the day, eventually reaching an intraday high of 2.399% in the minutes before the FOMC. Yields immediately dropped following the release however with a 9bps tightening to close more or less unchanged at 2.317% (+0.7bps). Yields have in fact declined a further 4.8bps this morning and are currently hovering around 2.268%. It was a similar story in Fed Funds contracts yesterday where yields on the Dec15, 16 and 17 contracts fell 3.0bps, 5.0bps and 5.5bps respectively.

In terms of the dot plots first of all, as largely expected the median dot for 2015 stayed at 0.625% or consistent with two rate hikes this year. It was the dispersion around this median however which was interesting. In the March meeting, there were 7 dots at 0.625%, 7 dots above this and 3 dots below. The latest forecasts now show 5 dots at 0.625%, with 5 dots above this and 7 dots below (of the 7 dots below, 5 are forecasting one hike and 2 are forecasting no move at all). There were plenty of suggestions that one of the dots representing just a single hike belonged to Fed Chair Yellen, although in reality it’s not possible to tell. DB’s Peter Hooper noted that the count is potentially closer that it appears now because most if not all of the five favouring one hike are likely to be voting members. Given this uncertainty, Peter thinks that this makes the dot charts considerably less clear as a guide to Committee expectations about the timing of liftoff than it was three months ago. In doing so, it also gives the Chair more flexibility as she now has an easier option to guide the Committee towards September or December depending on how the data are coming in over the month just ahead. Meanwhile, the median dots for 2016 and 2017 were revised down 25bps each to 1.625% and 2.875%, but interestingly the long-run forecast was unchanged at 3.75%.

Away from the dot plots and as largely expected the statement on the whole painted a more upbeat picture of the economy relative to April’s meeting. Yellen acknowledged that the disappointing economic performance in Q1 was largely transitory, as well as noting improvements in the pace of job gains and the labour market. Yellen also said that any tightening would be ‘gradual’ and that the Fed would not follow a ‘mechanical’ formula. There was also some acknowledgement of positive signs for inflation. When questioned on Greece, Yellen said that the difficulties there do have the potential to disrupt global financial markets and that these could spill over negatively into the US economy. As expected, 2015 growth forecasts were lowered to 1.8% to 2.0% from 2.3% to 2.7% previously, while there was a small tweak upwards in unemployment forecasts for the year. Headline and core PCE inflation estimates were unchanged for this year with some minor tweaks to 2016 and 2017.
With the move lower in Treasury yields, the Dollar sold off in parallel as the Dollar index ended -0.75%. US equities traded with little obvious direction for the most part, paring some modest losses leading up to the FOMC with the S&P 500 (+0.20%) eventually finishing slightly up on the day. Gold (+0.29%) also gained following the release, while oil markets ended more mixed with WTI (-0.08%) declining slightly and Brent (+0.27%) a tad higher.

Looking at the early reaction in Asia this morning, bond markets have largely followed the lead from Treasuries, where 10y yields have fallen led by Australia (-14.2bps) while Singapore (-2.6bps), Japan (-3.3bps) and South Korea (-2.6bps) are also tighter. Asia currencies are having a stronger morning too. The Malaysian Ringgit (+0.92%), Korean Won (+0.94%) and Philippines Peso (+0.27%) all up against the Dollar. Meanwhile a report showing that China property prices for May were deflating at a slower rate (-5.7% yoy vs. -6.1% in April) doesn’t appear to have helped give a lift to equity markets in the region where the Shanghai Comp (-0.18%) and CSI 300 (-0.48%) are both currently down. It’s a similar story elsewhere too with the Nikkei (-0.85%), Hang Seng (-0.06%), and ASX (-1.49%) are all lower this morning.

Back to China, yesterday our Chief China Economist Zhiwei Zhang noted that the State Council had held a meeting and decided to launch more investment projects to boost growth. The measures were said to include housing renovation plans, investments in rural power, food storage and also the speeding up of investments in water management and railways. Zhiwei believes that this is more evidence of significant fiscal easing and reinforces his view that growth will pick up slightly to 7.0% in Q3 and 7.2% in Q4.

Back to yesterday, it was something of a day of two halves as pre-FOMC Greece headlines once again dictated most of the price action in Europe. Indeed it was a weaker day in equity markets as the Stoxx 600 (-0.45%), DAX (-0.60%) and CAC (-1.02%) all declined, while Greek equities fell 3.15%, the fourth consecutive daily decline with the index now down over 17% in that time. It was a bit more mixed in bond markets as 10y Bunds eventually closed 1.1bps wider at 0.806% having traded in a tight range for most of the day, while it was a better day for the periphery as Spain (-2.5bps), Italy (-1.6bps) and Portugal (-4.8bps) yields all fell. The same couldn’t be said for Greece however where 10y yields ended 19bps wider at 13.134%. European credit markets were under pressure also. Crossover ended 7.5bps wider while Main hit fresh 8-month wides after another +2.3bps move yesterday. In fact just looking at the cash spreads now for Euro IG, as of Tuesday’s close cash spreads are now at 14-month wides having moved steadily wider since mid-May. Data flow in Europe yesterday was confined to Euro area CPI where the final May print for the headline (+0.3% yoy) and core (+0.9% yoy) were unchanged.

It was another day of largely negative headlines out of Greece leading into today’s Eurogroup where expectations appear to be pretty low for any hope of a breakthrough. Yesterday we heard Greece PM Tsipras again heighten tensions after saying that ‘if we don’t have an honorable compromise and an economically viable solution, we will take the responsibility to say a big no to the continuation of a catastrophic policy’. Meanwhile, Bank of Greece Governor Stounaras fired a stern warning after saying that ‘failure to reach an agreement would mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the Euro area’. This came as the ECB yesterday raised the ceiling on the ELA facility, while there were no announced changes to the discounts on collateral pledged.

Over on the European side, German Finance Minister Schaeuble told parliament that the German government is preparing for the worst. In expectation of no breakthrough tomorrow, attention will turn to a likely EU Leaders Emergency Summit meeting this weekend. Given Tsipras’s repeated rhetoric that any agreement must be struck at the highest possible political level, the meeting could be seen as the best possible chance.

Wrapping up, there was also Central Bank attention in the UK yesterday following the release of the BoE’s minutes. They indicated a somewhat more hawkish tone with the minutes noting that factors constraining price growth ‘were likely to dissipate fairly shortly’ and may well ‘strengthen’ by year-end. The BoE’s Forbes added to this saying that she sees UK inflation rebounding ‘fairly quickly’ while yesterday’s employment data was certainly supportive, in particular the rise in average weekly earnings to +2.7% yoy in the three months to April from +2.3% previously – the highest since 2011. 10y Gilts ended +7.4bps higher in yield yesterday and back above 2% at 2.060%. The Pound closed 1.2% higher versus the Dollar.

Looking at the day ahead now, the bulk of the attention will likely remain on Greece with the Eurogroup meeting due while data wise we get UK retail sales for May and the Norges Bank rate decision where consensus is for a cut in the deposit rate. It’s set to be another busy day across the pond this afternoon with US CPI due for May, while initial jobless claims, average weekly earnings, the Conference Board leading index and the Philadelphia Fed business outlook round off a busy day ahead.

Greek Deal Won’t Save the Country’s Banks

Greek banks, which received two capital infusions in the past two years, may need a third one as a recession drives up losses from bad loans.

The four biggest lenders, accounting for 91 percent of the country’s banking assets, could see their 12 billion euros ($14 billion) of tangible core capital wiped out by mounting provisions as overdue and restructured loans default. Even if Greece reaches an agreement with European creditors to free up additional money, its next bailout will need to include a new round of funding for the ailing banks.

Bad loans rose last quarter as the economy slipped back into recession and Greeks delayed payments waiting for the new government to pardon debt. With the recovery stalled, the four banks — National Bank of Greece SA, Piraeus Bank SA, Alpha Bank AE and Eurobank Ergasias SA — could require 16 billion euros in additional provisions to cover losses if half of the 59 billion euros of overdue and restructured loans on their books sour.

“We had expected nonperforming loans to peak in the first quarter, but we now expect this sometime in 2016, subject to some kind of economic stability,” said Nondas Nicolaides, an analyst at Moody’s Investors Service in Athens. “There’s a high risk that restructured loans and others showing signs of trouble will slip back into default. It’s a possibility the banks might need another round of capital injections.”

Spokesmen for National Bank, Piraeus and Eurobank declined to comment. A spokeswoman for Alpha didn’t return calls.

Tax Assets

Even after two previous capital infusions, including a bailout by the European Union and the International Monetary Fund, Greek banks are thinly capitalized. More than half their capital is made up of deferred tax assets, or DTAs, credits for losses that can be used to reduce taxes when the banks return to profitability. The credits only have value if the government, which is almost broke, can convert them to cash.

Global rules implemented after the 2008 financial crisis are phasing out the use of DTAs as capital because they don’t help absorb losses. Some European countries including Greece converted them to government guarantees of future credits. The European Central Bank is skeptical of their use and may ask banks to increase equity to lower their reliance on such capital. The 12 billion-euro figure for tangible capital at the four Greek banks excludes DTAs.

Reversing Outflows

Analysts and investors have focused more in recent months on liquidity — how banks are funded — than on solvency. Lenders have lost more than 20 percent of their deposits since November, according to Greek central bank data and JPMorgan Chase & Co. estimates. The firms have relied on almost 120 billion euros of funding from the ECB and Greece’s central bank to replace the deposits and are close to running out of collateral to pledge.

Bank executives expressed optimism during first-quarter earnings calls that the outflows would reverse once the government reaches an agreement with its creditors. While that would resolve the liquidity issue, it would do little for longer-term solvency. With an agreement in place, the banks could switch back to ECB funding, which is cheaper than loans from the Greek central bank. Still, those savings pale in comparison to potential losses from souring loans.

Shares of the four Athens-based banks have gyrated in recent months depending on how close or far an agreement between Greece and Europe looks. They fell again earlier this week when a negotiating session ended after 45 minutes. Since December, they’ve lost about half their value.

Restructured Loans

The four banks had an aggregate 59 billion euros of restructured and overdue loans that they didn’t consider impaired at the end of 2014. Banks typically restructure loans by modifying payment schedules or lowering interest rates to help struggling borrowers continue paying. Those borrowers remain at a heightened risk of going back into default, with the failure rate often depending on how long it takes their country’s growth to resume.

In India, where the economy is booming, more than 40 percent of restructured loans have turned bad in the past four years. In Greece, where gross domestic product has shrunk more than 25 percent in six years, the rate will probably be higher.

Greek banks provision for an average of 55 percent of the value of soured loans based on the assumption the firms will be able to recover the rest. That means they’ll need to set aside an additional 16 billion euros if half of the restructured loans and those less than 90 days overdue fall into default.

Capital Controls

As Greece and its creditors head for a showdown, the specter of the country’s exit from the euro or the imposition of capital controls is rising. The latter would try to halt the deposit flight from the banking system by restricting cash withdrawals and money transfers abroad. Such controls could hurt the economy more as importers face difficulty paying suppliers and consumers without full access to their savings cut spending. That could further sap borrowers’ ability to pay and speed up the rise in bad loans.

The four banks reported at the end of the year that they had collateral worth about 60 percent of their total loan books, without breaking down how much of that was for soured debt. Countries that have tried to clean up their banks after an economic or financial crisis have sold bad-loan portfolios for as little as 10 percent of face value. When banks repeatedly restructure bad loans, they usually end up delaying the day of reckoning as well as economic recovery because they can’t make fresh loans to worthy companies in need.

That suggests the recovery rates banks assume are probably unrealistic. Housing prices in Greece, which have declined about 40 percent since 2008, would fall further if banks tried to foreclose and sell the property, according to Nondas at Moody’s.

“The real recoverability of the bad debt is probably not so realistic,” said Jonas Floriani, a London-based analyst who follows Greek banks for Keefe, Bruyette & Woods. “The time it takes to recover, the legal issues, all those would reduce the final value they can receive.”

 

end

Zero hedge also weighs in on the above story:

(courtesy zero hedge)

Greek Bank Run Crosses Terminal Phase: Depositors Yank €2 Billion In Past Three Days

At this point, regardless of whether Greece miraculously cobbles a last minute deal together and gets just enough funds to pay back the near-term debt maturities (long-term can be found here):

 

And interest payments:

… to the IMF, it is too late to save the Greek bank system.

The key reason, as Reuters just updated, is that the Greek bank run which we have been closely tracking in recent months, just saw its biggest 3 days surge perhaps in history, when Greek depositors yanked over €2 billion from local banks, an amount which means the latest ELA boost has already been depleted, and amounts to about 1.5% of total Greek deposits.

In context this would be equivalent to about $150 billion in deposit outflows from US banks in half a week, or about 10% of the total amount of currency in circulation.

Per Reuters, “Greek banks have seen deposit outflows surge to about 2 billion euros over the past three days, with the pace of daily outflows tripling since the collapse of talks at the weekend with creditors, three banking sources told Reuters on Thursday.

Talks between Greece and its euro zone and IMF creditors collapsed over the weekend in Brussels, leaving the country on the verge of a default at the end of the month and sparking fears of capital controls.

 

Before the collapse of talks, bankers said outflows had been ranging between 200-300 million euros a day.

 

A spokesman for the Greek central bank declined to comment on the figures, saying it releases data on deposits on set dates every month and would publish data for May on June 26.

We now expect more images such as this one hitting the social networks momentarily:

But that’s just the first part of the bad news for Greek banks. The second one comes courtesy of Bloomberg’s Yalman Onaran who reminds us that it is not just a matter of liquidity (which is only there as long as the ECB keeps boosting its ELA allotment), but also solvency. To wit:

The four biggest lenders, accounting for 91 percent of the country’s banking assets, could see their 12 billion euros ($14 billion) of tangible core capital wiped out by mounting provisions as overdue and restructured loans default. Even if Greece reaches an agreement with European creditors to free up additional money, its next bailout will need to include a new round of funding for the ailing banks.

 

Bad loans rose last quarter as the economy slipped back into recession and Greeks delayed payments waiting for the new government to pardon debt. With the recovery stalled, the four banks — National Bank of Greece SA, Piraeus Bank SA, Alpha Bank AE and Eurobank Ergasias SA — could require 16 billion euros in additional provisions to cover losses if half of the 59 billion euros of overdue and restructured loans on their books sour.

 

“We had expected nonperforming loans to peak in the first quarter, but we now expect this sometime in 2016, subject to some kind of economic stability,” said Nondas Nicolaides, an analyst at Moody’s Investors Service in Athens. “There’s a high risk that restructured loans and others showing signs of trouble will slip back into default. It’s a possibility the banks might need another round of capital injections.”

 

Just replace “possibility” with “certainty” and the picture is complete.  Spokesmen for National Bank, Piraeus, Alpha and Eurobank declined to comment which was to be expected. After all, what can they say?

In other words, the Troika – whose intention from the very beginning was to cripple Greek banks so badly and terminally that Tsipras and Varoufakis are forced to accept any terms hoisted on them as we predicted in January – has succeeded. The only question is how long until the Syriza government admits defeat.

 

end

Early this morning, markets responded to rumours that Europe was preparing emergency debt write offs in the future as long as Greece undergoes pension and VAT reforms.  It proved to be false!!

(courtesy zero hedge)

Europe Considers Emergency Debt Writeoffs As Greece Faces “Ungovernable Chaos”

Greek FinMin Yanis Varoufakis is in Luxembourg on Thursday for a meeting with EU finance ministers. Some EU officials indicated earlier in the week they hoped some progress on the stalemate between Athens and Brussels could be made at the meeting, but Varoufakis, whose track record at Eurogroup summits is not great, said he would not be presenting a new proposal at the talks, setting the stage for an emergency meeting between the EU’s top brass over the weekend and the possible imposition of capital controls to stem the flow of deposits out of the ailing Greek banking sector.

Protesters took to the streets in Athens on Wednesday evening, marking a fresh wave of anti-austerity protests while Zoe Konstantopoulou, the president of the parliament, chided Bank of Greece governor Yannis Stournaras for a report in which the central bank warnedof an “uncontrollable crisis” and “soaring inflation” if a deal with creditors isn’t struck soon. “With his report today, the governor of the Bank of Greece not only exceeded the boundaries of his institutional role, he is attempting to contribute to the creation of an asphyxiating framework in the moves and negotiating abilities of the Greek government,” Konstantopoulou said.

There’s some speculation early Thursday that EU officials could soften their stance on Greek debt relief. The idea that EU creditors should write down their Greek debt holdings in order to bring down the country’s unsustainable debt burden has been floated by the IMF on several occasions recently, although it’s been met with a lukewarm reception from Brussels. Three years ago, eurozone ministers agreed to consider writing down their loans to Greece in order to appease the IMF but never followed up. According to Kathimerini, that agreement could be reiterated next week at the EU Summit. Here’s more (Google translated):

While finance ministers of the Eurozone have gathered in Luxembourg for another Eurogroup, in which the expectations of any progress in the Greek issue is very limited, discussions focus on who and when there could be a further debate which will bring and the solution to the impasse that has been created in recent months.

 

According to a senior European official said the scenario is considered and the more likely this time is to convene an emergency summit of eurozone members Thursday evening (25.06) after the end of the deliberations of the Summit scheduled on that day and has very heavy agenda. The aim is the Greek issue not overshadow this way the other serious issues to discuss as the Grexit and immigration policy. At the same time it will have spent one week from today’s Eurogroup meeting without another thus putting further pressure on the Greek side.

 

According to him a high-ranking European official, this time from European Commission and European Central Bank edit text that refers to the debt issue in the event of agreement. A re-statement for debt relief won the Greek side of the Eurogroup of November 2012 when he was the Minister C. Stournaras.

More, via Bloomberg:

EU Commission, ECB draft statement on debt relief, which could be used if a deal is reached between Greece, creditors, could be a renewal of Nov. 2012 Eurogroup commitment, Kathimerini reports, citing unidentified EU official.

 

Euro area finance ministers agreed in Nov. 2012 that “euro area member states will consider further measures and assistance, including inter alia lower co-financing in structural funds and/or further interest rate reduction of the Greek Loan Facility, if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the programme”

 

This would be “in order to ensure that by the end of the IMF programme in 2016, Greece can reach a debt-to-GDP ratio in that year of 175% and in 2020 of 124% of GDP, and in 2022 a debt-to-GDP ratio substantially lower than 110%”

 

Greek govt has said that country needs something more concrete than Nov. 2012 commitment, which was never implemented even after Greece achieved a primary budget surpluses in 2013, 2014

As discussed last weekend, it’s possible that Greek PM Alexis Tsipras could spin a writedown of Greece’s debt burden as a concession he extracted from creditors in exchange for a softened stance on pension reform and the VAT, although it isn’t yet clear how well that would play with Syriza’s Left Platform or with voters.

Meanwhile, Christine Lagarde is attempting to dispel the idea that she has discretion to grant Greece a grace period after June 30. From Bloomberg:

“I have a deadline, which is 30th of June, when a pyament is due from Greece,” IMF Managing Director Christine Lagarde says at press conference in Luxembourg. “If 1 July it’s not paid, it’s not paid.”

 

“There is no grace period or 2 months delay as I have heard.”

 

“It will be in areas, vis-a-vis the IMF. But I hope it’s not the case.”

Despite the rhetoric, it certainly does appear as though Lagarde could avoid triggering accelerated payment rights for other creditors by delaying the delivery of a formal failure to pay notice to the IMF board by 30 days.

Finally, some asset managers contend the market is understimating the fallout from an escalation in the Greek crisis. Russel Matthews of Bluebay for instance, says ideology and politics may prove difficult to overcome. Indeed, the following comments echoe everything we’ve said recently about the politicization of the negotiations:

Sovereign markets are still unprepared for the uncertainty and turmoil that is coming in Greece, Bluebay portfolio manager Russel Matthews says in interview.

 

Divide between Syriza and European policymakers is too large; early expectations of a last-minute deal have been shattered due to danger Syriza poses for euro zone.

 

European institutions “cannot allow Tsipras to be seen to be successfully breaking the rules of the game”.

 

“Syriza is an ideologically driven entity” which makes it highly unlikely that deal can be done in time to prevent onset of capital and deposit controls in Greece.

 

Tsipras’ claim to be working for all Europeans is a “dangerous assertion to make to the political hegemony that has designed the system that governs Europe”.

 

Had hoped Tsipras would be more pragmatic once he was in power but “increasingly obvious that he sees himself more as an activist hero”; has turned into Chavez rather than Lula.

We’ll close with Matthew’s grave warning about what comes next:

“Greece domestic situation will be chaos and ungovernable.”

end

The IMF has decided that it will not give one day past the June 30th deadline for Greece to pay what it owes.

Two weeks ago, in “Greece Breaks America’s Heart, Will Sign MOU With Russia For Gas Pipeline,” we highlighted comments from Greek Energy Minister Panagiotis Lafazanis which indicated that Athens was prepared to sign an MOU with Russia on the Turkish Stream pipeline.

As a reminder, The Turkish Stream will allow Gazprom to bypass Bulgaria by piping gas through Turkey, then through Greece, Serbia, and Hungary straight to the Austrian central hub.

Washington urged Greece to spurn the Russians and support an alternative pipeline plan designed to let the EU tap into Caspian gas via a series of connecting pipelines running from Azerbaijan to Italy. The Greeks, seeing no need to view the two pipeline projects as competitors, indicated that they would be open to supporting both. “Greece is no one’s property,” Lafazanis said, adding that Athens would “move based on its national interests.”

As is becoming more apparent by the day, the country’s “national interests” are clearly not aligned with the rest of Europe and to the extent Gazprom would be willing to advance Greece a portion of the projected revenues from its portion of the pipeline, Athens interests very clearly align with Moscow’s which is why no one should be surprised that Greek energy officials indicated Thursday that the MOU was a done deal. WSJ has more:

Greece is expecting to sign a preliminary agreement for the country’s participation in Russia’s planned extension of a gas pipeline through Greek territory, Greek energy ministry officials said Thursday..

 

The potential Greek-Russian agreement, which wouldn’t be legally binding, is expected to be signed Friday during Greek Prime Minister Alexis Tsipras’ visit to an economic conference in St. Petersburg.

 

Mr. Tsipras is due to meet Russian President Vladimir Putin Friday on the sidelines of the forum.

 

The agreement on the so-called ’Turkish Stream’ gas pipeline, which would bring Russian gas to Europe through Greece and Turkey, is expected to be signed by the Russian and Greek Energy Ministers, the Greek officials said.

But the Turkish Stream MOU with Greece wasn’t the only preliminary energy deal Gazprom inked on Thursday. The company also signed a memorandum of intent with Shell, E.On and OMV to double the capacity of the Nord Stream pipeline — the shortest route from Russian gas fields to Europe — to 110bcm/year. The Nord Stream 

Here’s WSJ again:

 

 

State-controlled Gazprom said it had signed a memorandum of understanding with Royal Dutch Shell, Germany’s E. ON and Austria’s OMV AG to add two lines to the Nord Stream pipeline, opened in 2011 as part of a Russian strategy to circumvent transit countries such as Ukraine. 

 

Gazprom said the additional pipelines in the Baltic would double Nord Stream’s current capacity of 55 billion cubic meters a year. Gazprom accounts for one-third of the European Union’s imports, around half of which is transported through Ukraine. 

 

Gazprom said the companies would form a joint venture for the project. The creation of additional transport infrastructure along the shortest route connecting gas fields in northern Russia and markets in Europe will facilitate an increase in the security and reliability of deliveries under new contracts, said Gazprom Chief Executive Alexei Miller.

 

(Nord Stream line)

It appears Russia is making progress in efforts to facilitate the unimpeded flow of gas to Europe even as the crisis in Ukraine has escalated recently in the face of conflicting reports about artillery fire and various other violations of the ceasefire struck four months ago in Minsk. Gazprom also faces anti-trust charges filed in April by the EU Commission.

Perphaps Moscow thinks now is a good time to beef up the capacity of existing supply routes considering the increasinly tenuous situation in Ukraine and given that events in the Middle East may eventually conspire to bring a new source of supply for the EU online…

end

Meanwhile In Athens, There Is A Pro-Austerity, Anti-Syriza Protest – Periscope Live Feed

Total Greek Deal Failure Sparks Biggest Buying Spree Since 2011, Stocks Set New Records

Today’s CPI misses despite the rise in gasoline prices.  Core inflation the smallest so far in 2015.  With the Fed desperately trying to reflate the balloon, this is not going too well: