Has ECB Damaged Greece Beyond Repair?

07/10/2015 9:00 am EST

Focus: CURRENCIES

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

Veteran currency analyst Boris Schlossberg,of BKForex.com, outlines how—with markets beginning to realize the sobering truth about Greece—the euro remained under pressure on Thursday. However, Boris also highlights the slightly brighter news from Asia that saw this currency pair rise nearly a full figure from its session lows.

Market Drivers July 9, 2015
Gloomy comments suggest Greece may be sliding towards Grexit
AU employment beats on all fronts
Nikkei 0.60% Europe 0.95%
Oil $52/bbl
Gold $1162/oz.
hope but

Europe and Asia:
AUD AU employment 7.3K vs. -2.1K
AUD AU rates 6.0% vs. 6.1%
EUR GE Trade Balance 22.8B vs. 20.5B

North America:
CAD NHPI 8:30
USD Weekly jobless 8:30

Gloomy comments from a series of ECB officials scuttled an early morning rally in the euro sending the pair to fresh session lows at 1.1028 as the possibility of Grexit grew stronger by the moment on Thursday. ECB President Mario Draghi—in a moment of unguarded pessimism—stated that a deal with Greece may not take place. “This time it’s really difficult,” he told an Italian newspaper in an interview.

ECB member Noyer noted that Greece was on the edge of catastrophe and the authorities are “starting to get very worried” while Hansson stated that the “Greek situation is much worse than even 10 days ago.”

There is no doubt that behind the scenes negotiations must be occurring at a furious pace as both parties try to arrive as some sort of compromise rescue package that could keep Greece in the union and put it back on a path to growth. However, the events of the past week may have damaged the Greek economy to the point of no return. By limiting the ELA program, which in all, practically pushed Greek banks into bankruptcy, forced capital controls, and destroyed all functioning payment systems in the country, the ECB may have damaged the Greek economy beyond repair.

The country will not only need fresh funds to service its current debts, but at least 50 Billion euros beyond that to simply jump start the economy. The latter estimate was from IMF, and may, in reality, be a figure twice as large given the damage done over the past few days. Under such conditions, it’s difficult to see how the two parties could come to some viable agreement by Sunday unless the Eurogroup realizes that the political costs of losing Greece would be far greater than the short-term economic pain to the EZ budget.

At this point, there seems to be almost no will to put politics ahead of economics and the negotiations may bog down in technical minutiae that will result in a Grexit with all of its unknown consequences. On Thursday, with markets beginning to realize the sobering truth, the euro remained under pressure dipping towards the 1.1100 level in morning European dealing.

Elsewhere, the news from Asia was a bit brighter with Shanghai composite closing up 6.4% on the day after a series of very heavy handed interventions. Chinese authorities seemed to stem the tide of selling for now. Amongst the newly implemented measures was a 200B RMB fund designed to provide credit for equity purchases, as well as a new rule that forbid investors who owned more than 5% of equity of the company from selling their position for at least six months.

Whether such artificial measures could stabilize the market for more than a few days time remains to be seen, but for now, they provided a modicum of support for risk FX, with USD/JPY rising nearly a full figure from its session lows to 121.45. Aussie was well bid also as the pair rose to within a few pips of the 7500 level on the back of better than expected employment data which printed at 7.3K versus -2.1K eyed. However, the gains did not last as the gloomy rhetoric from Europe send the pair below 7450 by mid-morning London dealing.

In North America Thursday, the calendar only carries the weekly jobless claims so economic news won’t have much impact on trade as focus will stay firmly anchored on the other side of the Atlantic. Unless there is some progress reported on the negotiations, the euro may slide lower as Thursday proceeds.

By Boris Schlossberg, Co-Founder, BKForex.com

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