Tsipras Caught Between A Rock And A Hard Place

•Tsipras caught between a rock and a hard place Optimism about a solution to the long-running Greek drama is running high, as both sides show new determination to reach an agreement. Greek stocks were up 6.1% yesterday, with the banks rising 10.4%. Nonetheless, there are still a lot of hurdles to overcome as Greek PM Tsipras is caught between a rock and a hard place: Officials think his proposals do not go far enough, while members of his own party think they go too far.

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•According to the Greek newspaper Kathimerini, EU officials say that Greece’s proposals violate many of the creditors’ “red lines” on value-added tax rates and pensions. Creditors think the Greek proposal is too heavy on revenue-raising measures, which could push the country back deeper into recession, rather than spending cuts, which tend to be more supportive of growth. The IMF In particular has been saying that Greece needs to cut spending, not raise taxes, yet EUR 7.3bn out of the EUR 7.9bn of measures that Greece proposed are increases in taxes and social security contributions. Such a “solution” would be unsustainable if it were actually implemented, but given the country’s dismal record in tax collection, it in fact has only a small chance of being successfully implemented. Thus there is the chance that when Tsipras meets today with ECB President Draghi, EC President Juncker and IMF Managing Director Lagarde, it’s possible that Lagarde may tell him that the proposals are unacceptable and must be revised.

•At the same time, some members of Tsipras’ SYRIZA coalition also object to the new measures as being too harsh and say that they will vote against them. The government’s narrow majority means that if only 10 SYRIZA deputies vote against the package or even abstain, the government would need the help of opposition parties to pass the measures. That would hurt its credibility and throw the government’s future into question. To make matters worse, there is talk that Finance Minister Varoufakis may leave the government. Meanwhile, thousands of pensioners Tuesday evening demonstrated in the streets of Athens against the cuts.

•Assuming though that Greece works out some compromise with the EU and Greek lawmakers do approve the measures over the weekend, Germany’s Bundestag could vote on it on June 29th or June 30th. That probably wouldn’t be soon enough for Greece to receive the last disbursement of funds in time to make the payment due to the IMF on June 30th, but the ECB would probably allow the Greek central bank to raise the money in time through T-bills. If, however, something goes wrong, then the country will miss the June 30th payment to the IMF and that’s that. While the assumption of a successful resolution to the Greek drama has turned out to be negative for the euro, failure would probably be much, much more negative.

•Oil rises after API stats apparently show large drawdown in inventories Oil prices rose sharply after the American Petroleum Institute (API) weekly statistics apparently showed an 3.2mn barrel decline in inventories in the week ended June 19th, far exceeding expectations of a 2mn barrel decline. Expectations of rising demand are replacing fears of a Greek collapse, boosting oil prices. The result was a rise in the commodity currencies – AUD, NZD, CAD and RUB – although NOK did not participate in the rally, probably because of the divergence in monetary policy there. Note though that Iran yesterday raised new objections to some of the conditions for lifting sanctions, calling into question whether the country will be able to start exporting more oil. The collapse of the Iranian talks would probably boost oil prices significantly.

•Today’s highlights: In the European evening, the Eurozone finance ministers will hold an emergency meeting in a bid to reach a final bailout deal for Greece ahead of an EU leaders’ summit the following day.

•As for indicators, we get the German Ifo survey for June. The weak ZEW indices last Tuesday increase the likelihood of soft Ifo indices as well. Even though Tuesday’s PMIs showed that business conditions had improved in June, another weak Ifo reading could add to evidence that Eurozone’s growth engine is losing steam. The final GDP figure for Q1 for France is also coming out. The final data is expected to confirm the preliminary growth figure, thus the market reaction could be limited.

•In the US, the 3rd estimate of Q1 GDP is expected to show that the US economy contracted less compared to the 2nd estimate. Even though this is the final estimate and not that big of a market mover, it could prove USD-positive, as it will show a stronger Q1 compared to what was initially estimated (-0.2% qoq SAAR vs -0.7% qoq SAAR). Along with expectations of a rebound in Q2, this will keep the September rate hike scenario alive. We believe that if the economic outlook continues to improve in the next months and the momentum picks up, the first rate hike could occur in September and the USD could regain its strength. The 3rd estimate of the core personal consumption index, the Fed’s favorite inflation measure, is also coming out.

•As for the speakers, ECB Vice President Vitor Constancio speaks.