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Deepening recession heats up talk of Greece exiting Eurozone

Deepening recession heats up talk of Greece exiting Eurozone

Greek prime minister Samaras, facing deepening recession in the country, is set to meet with Luxemburg prime minister Juncker, German chancellor Merkel and French president Hollande next week to persuade Eurozone leaders to extend the time of austerity from two years to four years, up till 2016. According to Samaras’ plan, budget deficit will drop by 1.5% of GDP annually, which is much easier than prior agreement of 2.5% of GDP annually. And, an additional EUR 20b funding would be required to support Greece as deficit reduction in 2013/14 would be smaller than planned. That could be raised from either from IMF, treasury bills, or by postponing repayment of the EU/IMF loan from 2016 until 2020. However, Merkel’s spokesman Steffen Seibert insisted that there in no change in Germany’s stance on Greece and emphasized that “the agreed memorandum of understanding which states what the Greek obligations are remains the basis of all aid decisions.” The overall situation, including deepened recession, which showed -6.2% contraction in Q2 GDP, revived the talk of Greece exit.

Sterling strengthened against euro today after unemployment data unexpectedly improved to 8.0% in June. Meanwhile, the August BOE minutes indicated that policymakers voted unanimously to leave the Bank rate unchanged at 0.5% and adopt no change in asset purchases. Unlike previous minutes, the August one did not hint that the BOE is biased for further rate cut. We believe the BOE would gauge the impact of the new Funding for Lending (FLS) scheme before implementing additional easing measures. As such, the most likely of further easing would be in November, when the 50B pound of asset purchases is completed and the impact of the FLS would be reflected in the economy.

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