Euro slammed as Greek referendum on Troika proposals increases likelihood of exit from Eurozone

Enrique Díaz-Álvarez29/Jun/2015Currency Updates

World markets were riveted all week by the drip feed of headlines from the Greek negotiations, only to receive news after Friday’s close that the Greek Government would hold a referendum on the last Troika proposals on July 5th. More shockingly, Prime Minister Tsipras announced that the Greek Government would campaign for the rejection of these proposals.

Frantic meetings dominated the weekend, bringing to mind the worst days of the Euro crisis and the 2008 crash. Greece requested an extension of the current bailout, which expires on June 30th, so the program would last through the referendum; this request was promptly denied. The issue quickly became the Greek banking system, as the dreaded lines finally formed outside ATMs in Greece and the run truly began. On Sunday, the European Central Bank (ECB) froze liquidity assistance to Greek banks at current levels; this forced the hand of Greek authorities, and a banking holiday was announced until at least July 6th, together with severe restrictions on the ability to withdraw and move funds whenever the banks reopen.

This news certainly marks a serious calculation in the conflict between the Greek Government and the Troika, and the chances of Grexit taking place are undoubtedly higher than they were on Thursday, contrary to our expectations that an agreement would be in place by now. However, we believe the situation still presents hopeful features, and is amenable to a positive resolution.

  • Late on Sunday, the Troika presented yet another version of its proposals that inched closer to the Greek position, accepting a lower VAT level for the tourism industry. ECB officials stated that contact was continuing “at all levels”, and the US Treasury is applying pressure to all parties to continue negotiations. While the Troika stated that this new proposal was already in the works when the Greek Government broke off negotiations, this suggests that the current deal on offer is not an ultimatum and could be sweetened further.
  • Initial polls released over the weekend all suggested a clear majority of Greeks would vote to support the agreement offered by the Troika. Greek Finance Minister Varoufakis suggested in his blog that he expects Greeks to vote against the Government opposition to the agreement, and that this opposition could change, if a better deal were offered.

These factors suggest a possible way out of this mess: a moderate improvement in the terms offered to the Greek Government, including debt restructuring (which is inevitable at some point), would induce the Greek Government to throw its support to a Yes vote, obtaining a landslide and outflanking the radical left wing of Syriza.

As of now, however, all this is speculation. The Euro is sharply down, as are equity markets. This is a reflection in our opinion of the fact that traders and investors had taken an optimistic view of the chances for an agreement, and have been caught wrong-footed. The situation remains extremely fluid.


With almost no macroeconomic data on tap last week, the biggest news of the week was MPC member Martin Weale’s suggestion in a Financial Times’ interview that he intends to vote for a hike at the August meeting. As both core inflation and wages rebound (the latter considerably faster than the former) this will set up conditions for a Bank of England hike in the first quarter of 2016. Sterling’s muted reaction against the Dollar after the Greece news over the weekend is a sign that markets are increasingly pricing this in.


PMI surveys in June reversed their moderate drop from the previous month, although the details were a bit weaker than the headline. Current levels (54.1 in the composite index) are consistent with roughly 2% GDP growth. However, there are no signs of acceleration beyond this point, indicating that 2% is still the fastest that the Eurozone economy can grow even under current favourable conditions.


Second tier reports were generally positive last week in the US. GDP growth in the first quarter was revised up, from -0.7%, to -0.2%. Consumer spending rose by 0.6% in monthly terms in May, and previous month’s readings were revised upwards. We still expect the first interest rate hike to come in September, but look to this Thursday’s key payroll report for confirmation.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.