By: Foundation Securities Private Limited
Pakistan Strategy: The negotiation breakdown for 2nd bailout package between Greece and its creditors has surprised the investors across the globe with MSCI Emerging (EM) and Frontier Market (FM) Index closing down 2.2% and 0.1%, respectively. Major drag came from the banking sector which was 3.0% as per the MSCI. Our view is centered around the European authorities resorting to quick fixes to roll over Greek liabilities and putting off adverse implications (Greece exiting EU).
What is happening in Greece? Negotiations between Greece and its creditors broke down after the Greek government announced that it would hold a referendum on 05th July 2015. The breakdown of negotiations means Greece is unlikely to receive the final €7.2bn in bailout funding in time to meet the 30th June payment of €1.5bn to IMF. However, this is just the beginning as the funding is key for the country to meet €19bn of repayments due between now and CY15-end (key deadline is 20th July to repay €3.5bn to ECB).
Furthermore, Greece needs a third assistance package. The European Commission (EC) had an offer of an additional €35bn 7-year package on the table earlier in June. However, resolution of the final tranche is needed first.
Impact on Pakistan: Direct economic linkage between Pakistan and Greece is limited. The impact on Pakistan may likely come via confidence on its Eurobond yields and currency. In an event that Greece is unable to reach an agreement with the EC and IMF, the scenario of a Greek exit would further weaken the Euro (in base case we see the situation to get resolved with European authorities partly giving in to Greek demand). This could caused the US FED to delay its rate hike and hence, could also put off change of stance from other central banks (SBP included) to combat the impact of lowering demand. Exports to Europe constitute 30% of Pakistan total export of US$25bn.