Greece: back on the radar, but a rerun of 2015 unlikely

Greece has come back on to the market’s radar and the big question we need to ask is whether the current review of its fiscal position lead to a real, genuine pick-up in anxiety.

Source: Bloomberg

Could Greece default on one of its upcoming payments? Could it even leave the euro one day?

My own view is that 2017 is not the year where we’ll see a repeat of 2015 (and the so-called ‘Grexit’). Key elections in Holland, France and Germany, plus a temporary reprieve, effectively push out the issue until 2018. However, we should keep an eye on proceedings just in case markets do get a greater sense this is becoming a real market story that causes an increase in volatility.

The fact of the matter remains: the growth and fiscal targets of 1.5% growth and 3.5% primary surplus imposed on Greece under the 2015 agreement are simply unattainable over the longer term. The definition of ‘longer term’ takes on different timeframes depending on the organisation within the group of creditors (ie. the ECB, the European Commission, the IMF and the European Stability Mechanism). Germany feels these economic targets should evolve over ten years, while the European Commission say it should be one to two years, which seems pretty brutal. As far as I can see, the IMF hasn’t given a timeframe, but they want to see Greece heading down the right path. From what we have heard of late, they remain sceptical.

The IMF has called for debt relief, with bond holders writing off a portion of the Greek bond holdings, but there would be no appetite for that from the Germans ahead of the September elections. Although unlikely, one suspects it is not outside the realms of possibility for the IMF to pull out completely from its supervisory role, potentially as a result of the influence from Donald Trump and his anti-euro stance. The twist is, from what we are hearing at present, the Germans are only going to take part in providing future funding for Greece if the IMF are involved, so the creditor nations are certainly trying to show a united front.

There have been calls from creditor nations for Greece to commit to even deeper austerity, with talk of a potential new agreement of fiscal targets and labour market reform. But neither of these issues are going to be palatable in Greece and, of course, the threat of new elections is always present.

One key aspect is Greece’s upcoming debt payments. As it stands, they don’t have the funds to cover these. Specifically, the market really is eyeing a €1.8 billion payment to the ECB in April and a €7 billion payment to the creditors due in July. One hopes and suspects they will get the funds to make the payment and this means either the creditors accept the path Greece is on, or a new (fourth) package will be negotiated. This will be painful for all involved (including market participants).

However, it seems most likely that some sort of agreement will be found prior to the payments. The market clearly understands that Greece do not have a sustainable path to any kind of prosperity under the shackles of austerity, but leaving the euro could be an absolute disaster as well. Of course, the medium- to longer-term goal is to one day be able to access the international bond markets. Clearly, this is some way off and Greece is certainly something to have on the radar.

Expect Greece to get more attention as we get closer to the payment deadlines and even more so if the creditors find fault in the current review into Greece’s growth and fiscal targets.

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