Weekly Risk Outlook

Weekly Risk Outlook
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Emergency summit in Brussels could be Greece’s last chance at resolving its debt. European foreign ministers meet to discuss Ukraine. Political scandal in Brazil hits U.S. courts. EU leaders meet to discuss migration policy and UK membership. All in this Weekly Risk Outlook. 

Emergency Summit in Brussels Could Be Greece’s Last Chance

On Monday, Eurozone leaders are scheduled to hold an emergency summit to discuss the ongoing crisis in Greece, particularly in anticipation of the country’s June 30 IMF deadline, in which Greece will have to repay a chunk of IMF loans valued at $1.8 billion.

IMF Director Christine Lagarde was unequivocal in the June 30 deadline, stating that Greece would be “in default” by July 1 if the payment was not made.

However, messaging from senior Greek government officials are not encouraging; on Friday Greek Finance Minister Yanis Varoufakis noted that Greece has already made a series of “gigantic” adjustments” to accommodate austerity obligations, and that it would not “jack-up” taxes or reduce benefits.

In St. Petersburg, Greek Prime Minister Alexis Tsipras noted that the Greeks “know how to deal with storms, and aren’t afraid to sail to distant oceans, to uncharted waters, in search of a safe harbor.”

Even as the European Central Bank has increased the cap on Greece’s Emergency Liquidity Assistance twice over the course of three days, many analysts expect capital controls will be enacted to prevent further bleeding of euros from Greek banks.

And although Prime Minister Tsipras and Finance Minister Varoufakis gave some hints of further digging in, some Greek analysts expect the Greek side to cave.

Miranda Xafa, a former Greek IMF representative, said that “Tsipras issued a dovish statement, indicating that he will blink and come to an agreement. The Greek premier overplayed his hand, believing that Greece is systemic and creditors would accept his demands.”

European Foreign Ministers Meet to Discuss Ukraine Developments

On Tuesday, the foreign ministers of Ukraine, Russia, Germany and France will meet for talks in Paris to discuss the Ukraine conflict.

Although the military situation in Ukraine has calmed somewhat since the Minsk Agreement, reduced tensions were not enough in preventing the United States and European Union last week from maintaining a united front and extending sanctions against Russia until January 31 2016.

The United States and European Union have also outlined possible further sanctions in the event that Russia extends its influence in Ukraine.

In response, Russia extended its own sanctions against the European Union.

Additionally, Ukraine has a number of increasingly dire economic conditions that have been exacerbated by the ongoing uncertainty of Russia’s position in Ukraine’s eastern region; it will need to make a $75 million coupon payment Monday for $3 billion in 2-year Eurobonds purchased by Russia.

Although the IMF has indicated a willingness to offer greater flexibility for the IMF’s loan program in Ukraine, this same initial flexibility in its loan program with Greece led to criticism within the IMF that it was favoring developed countries and was creating unsustainable debt programs.

Coincidentally, NATO foreign ministers are expected to meet the next day in Brussels to discuss reinforcing Eastern Europe against possible Russian aggression.

Political Scandal in Brazil Hits U.S. Courts

On Thursday, Judge Jed Rakoff of the Southern District of New York (which covers Wall Street) will hear claims from a class action suit of investors of the Brazilian oil giant Petroleo Brasileiro SA (Petrobras) regarding losses incurred from the bribery and contracting scheme that cost the company’s stock over $60 billion.

The federal investigation into both the political officials and business figures has taken an increasingly broad scope. On Friday Brazilian federal police arrested Marcelo Odebrecht, head of Latin America’s largest engineering company Odebrecht SA, and Otavio Azevedo of Andrade Gutierrez, both for complicity in spearheading billions in bribes from Petrobras through their respective companies.

The Petrobras case involves investors from several U.S. states and European countries, who collectively claim that the company was complicit in bribery, as well as false claims, leading the company to lose significant stock market value.

Petrobras has responded that the company itself was a victim, and that a few employees, construction firms, and politicians were the guilty parties (not the company itself). Judge Rakoff will be asked by Petrobras to throw out the case, though many legal experts expect Rakoff will proceed with the case.

Should the case proceed further, private investors will be able to subpoena private documents in Petrobras’ control, and could shed even further light on the ongoing investigation.

EU Leaders Meet to Discuss Migration and UK Membership

Beginning on Thursday the heads of state of the European Union are expected to hold a two-day summit to discuss migration policy and the United Kingdom’s call to renegotiate its membership terms in the EU.

Strengthened by last week’s Danish parliamentary election results, which pushed the center left coalition under PM Helle Thorning-Schmidt from power (and will likely elevate a center-right coalition and a resurgent Danish People’s Party), the United Kingdom is expected to advocate for greater control over migration policy, greater input from national parliaments in EU policymaking, and a reform of the European single market (likely to include non-eurozone EU states in Eurozone issues).

These talks will likely receive pushback from the EU. In a sign of the likely contentious nature of the talks last Thursday, President of the European Parliament Martin Schulz argued that the UK position regarding reforms in the European Union was driven by prejudice, “…Facts are twisted. Outright lies told. Then those lies are repeated …. Hatred is spread. People are used as scapegoats.”

In the event that a deal with Greece is not made on Monday (a distinct possibility given the wide divergence between the EU and Greece on the necessary policy steps needed for further bailout funds), the Greek crisis will also likely take a prominent position in the 2-day talks.

The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes. 

The Weekly Risk Outlook is written by GRI analyst Brian Daigle.

 

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