Daily Insight
Group Economics Macro & Financial Markets Research Nick Kounis, Aline Schuiling & Maritza
Greece stalemate continues
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25 June 2015 • • •
Eurogroup ends without an agreement – next meeting likely on Saturday Disagreement centres on pensions, VAT and corporate tax rate but can be bridged US consumer spending accelerates signalling economic growth rebound
Eurogroup again ends with no deal
US consumers dig into their savings
In what is becoming a reoccurring story, Thursday’s Eurogroup came and went without much sign of agreement. The meetings in the morning between Greek Prime Minister Tsipras and the leaders of the institutions were already a sign of things to come. The objective of the morning meetings were for the two
personal savings as % of disposable income
6 5.5 5
sides to agree on a document, which the Eurogroup could then discuss at the meeting in the afternoon. Instead, Greece and the institutions presented separate plans to the ministers of
4.5 4
finance. The message following the Eurogroup meeting was that a deal was not yet in sight. Pensions, VAT and corporate tax rate the sticking points There appear to be three main areas where Greece and the
3.5 Jan-13
Aug-13
Mar-14
Oct-14
May-15
Source: Thomson Reuters Datastream
institutions have differences. First of all pensions. The institutions want Greece to raise the retirement rate to 67
US consumer spending rebounds in May
quicker than proposed by the Greek government. They also
May’s report on personal income and spending suggests that
want the country to phase out a top-up payment for poorer
the US economy is returning to robust rates of growth. Indeed,
pensioners more quickly. Second, the creditors want Greece to
US consumer spending in May was the highest in six years,
include many types of food (including processed foods and
increasing 0.9% up from an upwardly revised 0.1% the
restaurants) at the highest VAT rate. Finally, the institutions
previous month. Meanwhile, personal income also showed a
would like to see a more modest corporate tax hike than
solid performance, as a result of a stronger increase in wages
proposed by the Greek government, as well as the scrapping
and salaries. Personal income grew by 0.5% in May,
of a special one-off tax on corporates with profits above 500K.
unchanged from the previous month. Consumers, even reached into their savings, since the saving rate dropped in
Differences have narrowed – next Eurogroup on Saturday
May to 5.1% from 5.4%, as they finally starting to spend the oil
The gaps between the two sides have reportedly narrowed. On
windfall.
all the areas mentioned above, the differences were much bigger a few days ago and now actually look like they can be
These reports offer more evidence that the economy is
bridged. Indeed, we continue to think that a deal will be
recovering in the second quarter after it contracted by 0.2% in
reached eventually. However, it may still come too late to
the first quarter. We think that consumption growth will remain
make the IMF payment on time on Tuesday, given the need for
strong on the back of a firm labour market and higher wages,
Greece to pass measures through parliament. In addition, the
as households continue to spend the windfall gains of lower oil
German parliament would also need to approve the deal. It is
prices. This data are likely to reassure the Fed as it moves
unclear how the IMF would deal with late payment. Though it
closer to a rate hike, which we expect will likely be in
has taken a tough line in public, its rules allow some flexibility
September.
and in any case it would not be widely seen as a technical default. One bit of good news is that bank deposit flight seems to have stabilised over the last couple of days, though it is too early to know whether this will be sustained, especially if the stalemate continues.