· Greece’s latest austerity measures don’t go far enough to solve its debt problems, says Standish’s Tom Higgins
· Social unrest abounds as the government struggles to satisfy either its electorate or the Troika
· We believe an ‘orderly’ default would be the best outcome, removing the ‘unknown’ fear which is currently dogging financial markets
Tom Higgins, global macroeconomic strategist at Standish, looks at the news regarding the latest Greek bailout attempt.
The Greek parliament recently passed new fiscal austerity measures aimed at slashing the country’s debt to GDP levels to 120% in 10 years. The decision was met by significant social unrest as Greek citizens hit the streets to demonstrate against the severe cuts – fiscal tightening that is required if Greece is to receive the full €130 billion bailout in return. Meanwhile, the ongoing crisis took another twist as Eurozone leaders cancelled an emergency meeting at which they were expected to agree upon the Greek bailout, prompting fears that they are not yet satisfied by the Greek government’s commitment to the proposed austerity measures.
“Tolerance for further fiscal cuts is extremely low in Greece, and this is concerning given the already unrealistic chance of it meeting its long-term targets,” says Higgins. “Indeed, even if – and it’s a big ‘if’ – the reduction to 120% of debt to GDP in 10 years is achievable, we don’t believe it goes far enough to solve its debt problems. The Greek electorate want a stop to the cuts, while the core European nations want a stop to the bailouts; something has to give. The risk of further restructuring and possible default will continue to cast a shadow over the Eurozone, and we believe that a default is ultimately inevitable. However, there is no knowing when it might happen, and how orderly or disorderly such a move would be,” he adds.
In the meantime, there are severe implementation risks for the fiscal cuts in Greece, with social unrest likely to persist. Earlier this week, the public order minister, Christos Papoutsis publicly stated that ‘the people can’t take any more [cuts]’ while, with an election looming in April, Antonis Samaras, who has been widely tipped as the next prime minister, has suggested that any deal with the Troika – European Union, European Central Bank and International Monetary Fund – might be renegotiated should he be elected. “This is hardly likely to reassure the already twitchy core European leaders,” says Higgins. “Greece has struggled to meet its March targets while its assumptions for future revenue growth seem unrealistic. Ultimately, the Troika will decide Greece’s fate. This leaves a further period of ‘muddling through’ and volatility will continue to afflict global financial markets, in our opinion.”
Single currency departure?
“We don’t think that Greece will exit the Eurozone in the short term but it can’t be ruled out as a longer term risk. However, for that to happen would require the situation to become even worse than it already is. Any exit would have severe ramifications both within Greece and across the single currency area,” he says. “In the short term, we believe the pain of leaving the Eurozone is likely to be worse than staying the course, but this may change in the future. Were Greece to default as well as exit the euro, it would still need to undergo stringent austerity measures but without the much-needed external help currently available,” Higgins adds.
“It’s very hard to predict if or when Greece might default, and there would almost certainly be consequences for the rest of the Eurozone,” he says. “However, the recent strong performance of Italian and Spanish government bonds suggests investors are beginning to differentiate between the solvency risk in Greece and the liquidity problems of Italy and Spain. That said, we believe that a Greek default would increase the risk of contagion to Portugal, where the debt dynamics are less favourable.
“Regardless, as long as the Eurozone continues to ‘muddle through’, the crisis will remain unresolved.” Higgins concludes, “At least an orderly default of Greece would remove the ‘unknown’ fear currently dogging markets, in our view, and only then would the region really be able to begin its recovery.”
Headquartered in Boston, USA, Standish is a specialist active fixed income manager investing in global fixed income markets and across the full credit spectrum.