No Greek Deal; Now What?

Despite earlier hopes that a deal would be made with the debt-laden Mediterranean state, Greek leaders have failed to agree on an austerity plan that creditors need to agree to a bailout. The International Monetary Fund and European Union were ready to offer €130 billion ($172 billion) in bailout funds in exchange for an agreement from Greece that it would implement steep cuts to domestic expenditure. A deal is increasingly urgent, as Greece needs money to pay for a bond redemption due on March 20th, when the country will need to pay out €14.5 billion to creditors or face default. A default would trigger credit-default swaps, which investors held as a bet against the Greek government paying their bills. Three-party talks amongst Greek politicians failed to reconcile differences before EU and IMF inspectors, which will lead to more European meetings. Finance Minister Evangelos Venizelos said, "I am leaving for Brussels in a short while with the hope that the Eurogroup meeting will be held, and a positive decision on the new program will be taken." The news has not made a significant impact on European markets, with the British FTSE 100, German DAX and French CAC 40 indexes up slightly in morning trading in Europe, and the Greek 10-year bond nearly unchanged at 32.8%. Investors may be feeling optimistic that the ECB will still accommodate Greece, even without austerity plans in place. While ECB President Mario Draghi has not spoken on the issue yet, the market may be up on hopes that the central bank will cut its rate, currently at 1 percent. Some analysts believe that a rate cut could come in March--or, at least, greater liquidity in March will improve the outlook for Europe, since the ECB has already showed signs that it will not cut Greece loose and threaten the integrity of the euro. The bank has already made public plans to offer low-interest three-year loans later this month, and the hope of future liquidity may explain the market rally, despite bad news from Greece. Paradoxically, Greek leaders' inability to make a deal may give some short-term certainty to the markets, because it motivates the ECB to do more of the same: provide liquidity. There is no pressing need to disburse cash to banks at the moment, thanks to a flood of €489 billion in December, but markets may be expecting a similar move if necessary, for as long as the Greeks refuse to come to an agreement.