Time running out for Greece

Takeaways: D-Day rapidly approaching for Greece as time is running out to agree a deal with its international creditors, secure the release of badly needed bailout funds and avoid defaulting on its obligations.

Rumours are rife that the Syriza government is preparing to take the dramatic step of declaring a default. The country is rapidly running out of funds to pay public sector salaries, state pensions and repayments, due to the IMF at the end of April and start of May.  The official party line from government officials in Athens, however, is to strongly deny that a default is being considered and continue to reiterate the government’s commitment to strike a deal with its creditors.

The Eurozone last week gave Greece six working days, until the 24th April, to come up with a revised package of reforms. These are needed in order to appease its creditors and facilitate the release the next €7bn of bailout funds needed, so that the country can pay imminent debt instalments. The government narrowly avoided defaulting last week when it repaid a €450m IMF loan by raiding the national pension and health service reserves. The government has resumed negotiations with its creditors on agreeing the fiscal measures, budget targets and privatisations being demanded.  Only if Eurozone finance ministers are satisfied with the Greek plan, when they meet next week, will more funds be released.

But, with the radical left wing government opposed to many of the policies its Eurozone partners have endorsed, it’s proving extremely difficult to strike a deal and Greece is feeling the squeeze.  The ongoing  negotiations have also not been helped by Greek demands that Germany pay €279bn in WW2 reparations that they believe they are owed, with the Greek government threatening to seize German property in Greece as part of the compensation. Greece’s PM has engaged in some further sabre rattling by making a provocative trip to Russia last week to hold talks with President Putin, although any request for a bailout loan from Russia has been flatly denied by both sides.

A Greek default would represent an unprecedented shock to the Eurozone’s 16-year old monetary union and would come only five years after Greece received the first of its bailouts. While some argue that the trip to visit President Putin and talk of imminent default are part of Greece’s negotiating tactics to extract the best possible conditions from its creditors, it still represents a huge gamble. Eurozone creditors are believed to have become extremely frustrated at what they claim are the shady negotiating tactics from the Greek government. Contingency plans are believed to be being drawn up should the Greeks default and leave the Eurozone. Despite claims from Eurozone countries that they are confident the currency area is now strong enough to ride out the consequences of a Greek default; it’s hard to not believe that this would still have huge negative ramifications for the whole Eurozone economy and liquidity within European credit markets as whole. One way or another, things appear to be coming to a head, with a Greek default appearing more likely with each passing day.

M&A continues to heat up

Away from ongoing debt problems in the Eurozone, the Global M&A market continues to heat up. Last week was the 10th highest ever in terms of weekly announcements, with US$161b being put up (source: Dealogic).

As confirmed in the recent release of EY’s Capital Confidence Barometer, M&A momentum is continuing to accelerate, with no lull in sight. Recent large cap deals, such as Royal Dutch Shell’s announcement to acquire BG Group and Nokia agreeing to acquire Alcatet-Lucent, continue to raise expectations that more transformative deals are on the way. M&A activity turned a corner in 2014 and a new wave is now expected as deal appetite hits a five-year high – with more than half of global companies now pursuing acquisitions. Increasing corporate confidence, positive economic conditions, regional variations, movements in currencies and commodities as well as disruptive sector plays are expected to be the main drivers for the continuance of strong M&A momentum.

EY’s 12th Global Capital Confidence Barometer is a biannual survey of more than 1,600 executives in 54 countries. A striking statistic is that 56% of global companies intend to acquire in the next 12 months, which is the highest appetite to acquire in 5 years. With global deal value already up 20% on 2014, the resurgence looks firmly entrenched.  Almost half of companies (47%) intend to complete more deals in the next year than in the past 12 months.

The number of deals in current pipeline – up 19% on 12 months ago – further underlines deal making intentions. The survey also found that companies with the largest pipelines are those aiming to further increase the number of targets in the next year.

Notably, 78% of companies have changed their M&A strategy as a result of increased deal activity in 2014. This suggests high-profile megadeal activity has triggered activity across the whole deal landscape. Virtually all respondents (98%) expect the deal market to improve or remain at current robust levels in the next 12 months.

No rise

David Cameron is to be the first sitting PM since Attlee in the 1950’s to have a whole term with no interest rate rise

With the Bank of England confirming last Thursday, in its final policy decision before the general election, that interest rates would remain unchanged, David Cameron has become the first UK prime minister since Clement Attlee in the 1950’s to serve a whole term without a change in interest rates. Other recent leaders, such as John Major, whose premierships were blown off course by rate rises, may well have a right to be envious of Mr Cameron’s situation, whose time in charge has coincided with the cheapest borrowing for 300 years.

A rate rise is now not being fully priced in by the markets until the Q2 of next year, which is a far cry from last summer when falling unemployment and sharply increasing house prices led economists to believe a rate rise was on the cards for early 2015. The three main factors contributing to the BoE holding off from raising rates are: 1) the fall in inflation due to the unforeseen tumble in oil prices; 2) wage growth continuing to lag expectations; and 3) the strength of the pound.

With inflation expected to remain around its current low of zero per cent – and well below the BoE’s stated target of 2 percent for most of the year due to the low price of oil coupled with the deflationary impact of the strength of the pound – whoever gets into power after the general election next month shouldn’t be worried about a rate rise for some time to come.