The US sharemarket has again confounded the pessimists by shrugging off the tumbling oil price and the ongoing stalemate over Greece to close at its highest level since last July.
The blue-chip Dow Jones Industrial Average closed above 18,000 for the first time since July, leaving it up nearly 15 per cent from its mid-February lows when it was weighed down by worries over global growth and tumbling commodity prices.
More surprisingly still, the US sharemarket appears to have loosened its link with the oil price, with which it has moved in tandem for most of this year. US shares moved higher even though the price of crude slipped after talks between oil producers in Doha on Sunday failed to reach a deal to curb output.
But investors’ optimism could be cut short by a fresh outbreak of jitters over Greece.
Greece and its creditors – the International Monetary Fund, the European Central Bank, the European Commission and the European Stability Mechanism – are due to resume talks today on what more Athens needs to do before it is allowed to access its third €86 billion ($125 billion) rescue package, agreed in August. This is no mere formality, given that the talks have already been dragging on for three months with little sign of consensus.
The main sticking point has been that under its bailout plan, Greece has to achieve a primary budget surplus (before interest payments on the country’s hefty debt) of 3.5 per cent of GDP from 2018 onwards.
The Europeans were inclined to take a more lenient approach, arguing that the steep spending cuts and tax hikes that Athens has already introduced, including the pension reforms unveiled in January, would allow the country to reach its goal.
But the IMF, which has a decidedly dimmer view of the Greek economy, argued that Athens would need to find an additional €3.6 billion in budgetary savings in order to reach the 3.5 per cent target. The alternative would be to reduce the country’s huge debt burden (which stands at 180 per cent of GDP), but this is something that Germany refuses to countenance.
On the sidelines of the IMF’s meeting in Washington late last week, Greece’s lenders reached an agreement. Greece would be asked to agree to adopt a new packet of reforms (which would deliver up to €3.6 billion in savings) in case economic growth stumbled in coming months, which would make its 3.5 per cent target unattainable.
But Greece’s Syriza-led government is resisting these new demands, arguing that the Greek economy is stagnating because talks over fresh funding have dragged on for so long. And it is dismayed that the emphasis is on fresh austerity measures rather than renegotiating the country’s debt.
There are also questions as to whether Greek Prime Minister Alexis Tsipras will be prepared to impose these fresh sacrifices on the long-suffering population. Several Greek newspapers ran articles on the weekend which speculated that Tsipras could resign if the talks fail.
The speculation is not completely unjustified. Tsipras’ parliamentary majority is wafer thin, with the Syriza-led coalition controlling just 153 votes out of 300. That’s enough to pass the tough measures, provided that Syriza can maintain discipline among its deputies.
In the meantime, time is running out. Financial markets are likely to start becoming jumpy unless Greece and its creditors can reach a compromise by May. Greece has to repay about €3.5 billion in loans to the ECB in July and its failure to access funding could revive the spectre of default and the country’s exit from the euro.
And this will exacerbate the nervousness caused by the looming June 23 referendum on whether Britain should leave the European Union.
Polls show UK voters are split over whether to leave or stay in the EU, with analysts saying that arguments over the economic impact of a Brexit could play a big role in determining the final outcome of the vote.
And certainly, UK voters are not being left in any doubt as to the potential risks of a Brexit.
Last week, the IMF warned that a Brexit would inflict “severe” damage on the British and European economies.
And overnight UK Chancellor George Osborne ramped up the rhetoric, warning that a British exit from the EU could permanently damage the UK economy.
Citing a new 200-page analysis by UK Treasury, Osborne warned that Brexit would cost UK households £4300 ($8000) a year by 2030, leaving them “permanently poorer”.