Greek Debt Negotiations Enter the 11th Hour, Euro Risks Loom Large

– A Euro Zone meeting on June 18 represents critical volatility risks for the Euro

– Lack of action from June 18 meeting could severely elevate risks of a Greek exit from the Euro

– Traders should monitor outsized volatility risk and manage positions accordingly

Greece enters the June 18th Eurozone meeting with a lot at stake, and a lack of material progress towards a new bailout agreement significantly elevates risks of a Greek exit from the Euro Zone. Thursday marks the Eurozone’s finance ministers meeting in which Greek government officials hope to secure a deal with the country’s creditors.

Greece’s current fiscal balance is clearly unsustainable and insolvency and default risks rise with each passing day. However, there may be hope for the country if it secures an extension on its current bailout agreement beyond June 30—the date on which the agreement expires. The Greek debt-crisis is nearing its climax, and a deal in the 11th hour will need to produce a favorable result in order for the finger pointing to end, which occurs on a daily basis between the institutions and Athens.

Odds of Material Progress or an Agreement Seem Low for June 18 Meeting

In the days leading up to the June 18th meeting there seems to be an impasse that is limiting progress between Greece and the institutions. A European Commission spokesman said “significant gaps” remained on the deal. French President Hollande insisted Greece must remain in the Euro but admitted there will be turbulence until Greece and its creditors reach a deal.

A spokesman for Germany’s finance minister says the ball is in Greece’s court, but Athens must provide new proposals. Yet Athens believes it has done its part and Greek Prime Minister Alexis Tsipras will not give into creditors’ demands. Reports have also suggested Greek Finance Minister, Yanis Varoufakis, does not plan to extend new proposals during the June 18th meeting.

Debt repayments for Greece virtually guarantee a technical default if the government is unable to secure new funding in the next month. In June Greece owes €6.74B between the IMF and short-term bills maturing. In July Greece owes €5.95B between the IMF, short-term bills, and critically the European Central Bank. The payments can be found in full detail here.

The June 18th meeting is significant because a bailout payment of €7.2 has been frozen for months as the new government of Prime Minister Tsipras and the Syriza party reneged on Greece’s existing bailout terms. The only way for Greece to access the sum is to reach a deal with the Eurozone prior to the self-imposed June 30 deadline.

The best chance for Greece to do so is dependent on whether they reach a deal with the Eurozone following the conclusion of the finance ministers meeting. For all the information that has been reported, the next few days will decide if Greece defaults before the end of the month, which many say is a growing possibility.

Lack of Agreement Doesn’t Guarantee Greek Exit, but Raises Risks Materially

The lack of an agreement by June 30 doesn’t technically push Greece into default as countries are granted some leeway in loan repayments to the IMF, but inaction would materially raise risks of a full-scale run on the Greek financial sector and substantial market turmoil.

Indeed, the Greek Debt-Crisis has seen deadlines pass and extensions granted as far back as December of 2009 when its credit rating was downgraded amidst fears of defaulting on the ballooning debt. The default fears continued into 2010 when it was first bailed out by Eurozone countries in return for a stricter austerity measures. The crisis deepened in 2011 when the European Financial Stability Facility supplied a major bailout figure of €109B. Protests emerged in the following years due to the mounting unemployment, which reached 26.8% and austerity measures that limited spending and strained Greek citizens. The most recent development included a delay in the IMF debt repayment, which Athens has indicated it will bundle along with the rest of the debts for one lump sum.

In each of these instances, negotiations lasted into the very last moment and yet Greece was able to avert default and remain within the Euro Zone. Given clear anti-austerity rhetoric from Greek Government officials and similar reticence for debt restructuring from the European Commission, however, we think this time could actually be different.

Investors should likely monitor position risks in Euro pairs heading into Thursday’s meeting and ahead of the June 30 deadline. A last-minute agreement remains the most likely scenario, but the probability of a material

Implied Volatility Points to Potentially Significant Euro Moves Ahead of Meeting

Data source: Bloomberg Professional Service, Chart Source: TradingView on DailyFX, Calculations: David Rodriguez of DailyFX.com

Written by David Rodriguez, Senior Strategist and Yash Gandhi for DailyFX.com

Greek Debt Negotiations Enter the 11th Hour, Euro Risks Loom Large