Weekly Risk Outlook

Weekly Risk Outlook

Eurozone reaches tough Greek deal. Trade talks between US and EU follow European parliament vote. Federal Reserve chair Janet Yellen delivers remarks to Congress. Bank of Japan announces interest rate. Presidential elections in Burundi cap tumultuous period. All in the Weekly Risk Outlook.

Eurozone Leaders Reach Tough Deal for Greece

A deal was reached by eurozone leaders late last night (Sunday) after 17 hours of negotiations. It includes significant austerity measures for the Greek government to ratify by Wednesday.

According to official statements, the deal includes a new €35 bn ‘growth package’ and some debt structuring on the condition that the Greek parliament passes significant reforms of its tax and pensions systems now and implements liberalising changes to its labour market  and finance sector later on. The package will give Greece time to negotiate a potential bailout.

In addition, Greece must place €50 bn of assets in an Athens-based fund with European oversight and half of it will be used to refinance Greek banks. It is unclear whether this will allow banks to re-open fully and remove the current limit of €60 on daily cash withdrawals.

Prime Minister Tsipras thus failed to secure the immediate debt relief he has promised to Greek voters, but did manage to remove an option of swift ‘Grexit’ talks if reform plans failed from the agreement. Officials from euro institutions and the IMF will be on the ground in Athens to monitor implementation of the reforms.

The test will be whether the Greek parliament can swallow such a hard pill, given the overwhelming popular vote against a previous reform proposal in a Greek referendum on July 5. Mr. Tsipras will have to secure mandates outside his government to pass the reforms and avoid influence of the anti-austerity members of his Syriza party.

It is still highly uncertain whether that support can be found.

In many ways, the negotiations process has revealed the limits of European cooperation. The French and Italian governments have pushed hard to maintain Greece’s position in the eurozone with a bailout extension.

Other countries have emerged with their toughest rhetoric yet against Greece remaining in the eurozone. Germany offered a proposal to expel Greece from the eurozone for a period of 5 years (which France has taken a dim view of).

Similarly, the Finnish Parliament has reportedly decided it would not accept any new bailout for Greece, with the Finns Party indicating it may withdraw from the governing coalition if the Greece bailout deal were passed, triggering parliamentary elections in Finland.

Slovakia has also indicated hesitation in extending bailout terms to Greece (in addition to the Baltic States of Latvia and Lithuania as well as Slovenia).

Additionally, much of the hesitation on the part of the German, Finnish, and Slovak government to extend bailout terms to Greece has been the deterioration in trust regarding the current Syriza government’s ability or willingness to carry out austerity policies. This week will demonstrate the extent of the ability.

Trade Talks between US and EU Follow European Parliament Vote

On Monday, the United States and European Union will hold their tenth round of negotiations of the Transatlantic Trade and Investment Partnership (TTIP), with a goal of completing a draft deal by the end of 2015.

The TTIP negotiations have struggled between the EU and the US due to tricky negotiating objectives and increasing resistance to the agreement (particularly in the EU).

Negotiating teams are currently working on understanding each party’s perspective on agriculture and manufactured goods tariffs, but one of the areas that continues to stand as both a complex objective and an area of public resistance is the Investor-State Dispute Settlement (ISDS) mechanism provision.

The US has pushed for the ISDS as a means for private companies to raise complaints regarding trade violations by free trade agreement partners. The US has been party to another ISDS for over 2 decades through the North American Free Trade Agreement and EU member states have been subject to over 1400 collectively, but there has been significant resistance from the European public as well as the European Parliament to ISDS in TTIP.

In early June, the European Parliament failed in a vote with compromise language on including an ISDS mechanism in TTIP, only to see it resurrected last week in a successful “new ISDS” European Parliament vote.

It is uncertain at this point what form the ISDS might take. Some have suggested national courts and others have referred to a possible permanent Investor Court. It appears likely that the ISDS talks will be the last subject of discussion in TTIP negotiations.

Several major developing countries (including Brazil, Indonesia, and South Africa) have come out against including ISDS bodies in any free trade agreements, with momentum building for dispute mechanism opponents.

It will be very difficult, if not impossible, for the EU to successfully forge a transatlantic trade agreement with the US without an ISDS.

Federal Reserve Chair Delivers Remarks to House and Senate

On Wednesday, U.S. Federal Reserve Chair Janet Yellen will deliver her testimony to the House Financial Services Committee, followed Thursday by testimony to the Senate Banking Committee.

Yellen noted last week that, despite recent market turmoil in China and Greece, she intends to raise the interest rate this year if the U.S. economy improves.

She did leave a little “wiggle room” for not following this course of action, noting in Cleveland that “the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

The speech (which can be read here) only noted Greece once, and mentioned that the labor market was improving with “some tentative hints” that wages have increased which “may indicate that the objective of full employment is coming closer into view.”

However, Chicago Federal Reserve President and FOMC Voting Member Charles Evans remarked the next day at a conference in Chicago that he wanted no interest rate hike until mid-2016, in stark contrast to what many analysts thought would be a September 2015 rate hike. No other voting member has said as much.

The IMF has also warned against a premature rate hike, and has suggested waiting until 2016 to raise interest rates. Yellen’s comments to both committees will very likely touch on the interest rate hike, and should be watched carefully for any hints of a September interest rate increase.

Bank of Japan Announces Interest Rate Decision

The Bank of Japan will announce monetary policy on Wednesday, following a two-day Bank of Japan meeting in Tokyo.

Although the BOJ is unlikely to indicate any groundbreaking developments regarding the interest rate (which has remained at 0% since 2011), the central bank will also update both its growth and inflation forecasts.

In March, Bank of Japan Governor Haruhiko Kuroda acknowledged that, despite his bank’s quantitative easing program, inflation would likely stay around 0% and could reach deflationary levels. A bump in prices after March was followed by a fall to effectively 0% in May, spurred largely by weak consumer spending.

Consumer spending appears to be the Achilles heel of Governor Kuroda’s QE program. Lower energy costs have boosted household incomes, and the unemployment rate has fallen to around 3.3%, but less than 5% of respondents to a Consumer Affairs Agency survey indicated they would increase spending in the next three months.

If this trend continues, inflation will remain stagnantly low, and increase pressure to maintain interest rates.

Presidential Elections in Burundi Cap Tumultuous Period

On Wednesday, Burundi will hold presidential elections, though the outcome could hardly be in less doubt.

Opposition groups have threatened to boycott the vote with President Pierre Nkurunziza’s bid for a third term in office, with an announcement last Friday that the vote would be postponed indefinitely (although the government was still figuring out an effective election date) taking hold.

The vote has already been postponed once, and Burundi law states that a candidate must be elected at least one month prior to the August 26 inauguration.

The political situation in the small central African country has been marked by rising tensions, and the UN Assistant Secretary General for Political Affairs, Taye-Brook Zerihoun, noted last week that the situation is “on the brink of devastating violence,” with “an escalating pattern of politically motivated violence, coupled with [Burundi’s] history of recurring bloodshed and atrocities.”

Nkurunziza’s party CNDD-FDD swept last month’s parliamentary elections (which the opposition also boycotted), creating a questionable platform for Nkurunziza’s possible third term.

The UN, European Union, African Union, and East African Community have all indicated that elections should be held freely and fairly, and political developments this week should indicate how seriously Burundi’s president takes these concerns.


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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