Here's why Greece will not rock the markets

Bank of America Merrill Lynch report says Greek govt has been more confrontational than markets had expected

Markets worst fear is coming true. Greece is playing the spoilsport which market participant feared that the country was capable of, especially after the hard-left Syriza party stormed to victory on the vow that they would tear up the bailout programme and end austerity measures imposed under it. 

Greece is seeking an extension of 240 billion euro ($270 billion) EU-IMF bailout programme. The bailout is due to expire at the end of February and failure to agree an extension would see Greece default on its giant debts, meaning that it would have to crash out of the euro.

However, the meeting which was held on Wednesday failed to reach a deal after six hours of negotiations. Greece’s Finance minister Yaris Varoufakis set out a new proposal for a debt programme at an emergency meeting with his counterparts from the 19-country Eurozone in Brussels. Talks are now scheduled for Monday, which is likely to be the last chance before any new deal could be put to national parliaments for approval before the current bailout ends.

Bank of America Merrill Lynch in a report on Greece says that the Greek government has been more confrontational than markets had expected. The report says that the Greek government can potentially get through the IMF payments in March, but would have difficulties after May. The longer the negotiation would last the worst the situation will get. On a worse case basis, the report says that there can be a bank run and capital controls in Greece, which would eventually lead to Euro exit if there were no agreement. 

According to a Standard Chartered report, the problem is that a financing gap is opening up. Greece must repay some euro five billion of IMF loans between March and July, and euro 6.7 billion to the ECB in July and August. Tax revenues are sagging and the government can build domestic arrears only for a limited time without damaging the fabric of the economy.

But developments might just not get out of hand. Greece is playing a very smart card during its negotiations. The country says it has now found new friends, namely Russia and China, who are willing to help the country out. 

Greek defence minister Panos Kammenos said: “We have other ways of finding money, it could be the United States at best, it could be Russia, it could be China or other countries." (Read here)

While the negotiations were on in Brussels, Greece’s foreign minister Nikos Kotzias was in Moscow meeting up with his counterpart in Moscow. In the press conference after the meeting Russian foreign minister Sergei Lavrov said that Moscow would consider a request for financial aid if one came from Athens. 

As for China the country already has financial interests in Greece which it would like to protect. China has invested heavily in Greece's ports and has other trade ties with the country. China, with its communist government would like to use this as an opportunity to increase its presence in Greece, especially with a hard-left government in the country and the only one in the Eurozone. 

Greece with its newly elected government is on a strong wicket and the Eurozone members would not like the country teaming up with Russia and China and destabilizes the zone further. Sooner or later they would have to align with Greece; if not they have more to lose than the money they have lend. 

Bank of America Merrill Lynch expects an ultimate resumption of an adjustment program, which in combination with QE would support performance in Greece.