Beware the Greeks bearing gifts…

Of course, most observers would hardly consider the outcome of Greece’s recent parliamentary elections as a “gift” to the Eurozone, the “Troika” (IMF/ECB/European Commission), or anyone but other “insurgent” parties within Europe.

Already the phony war of rhetoric and manoeuvre has begun; and the commentariat is in full cry. At an estimated 175% of GDP, Greece’s sovereign obligations are at a level where they are well beyond the EU’s supposed 120% “sustainable” threshold, and are supported by an economy which is unbalanced and often still uncompetitive, with a banking system that, in effect, depends upon the “pleasure” of the ECB’s Council to continue to permit the Greek central bank to provide Emergency Liquidity Assistance (ELA) to function.

The now dominant Syriza party is an untested and unknown quantity in terms of how it is likely to behave in government, even though it has already made some “market friendly” gestures; and the extent to which it will be willing and able to negotiate with Greece’s creditors, both public/sovereign and private, on alleviating the state’s debt burden remains unclear in light of recent statements.

On the one hand, there are the private creditors, who very much want and expect to be repaid principal and interest in a timely manner, and not subjected to another “re-profiling”, “haircut”, or outright default. In reality, given that some 80% of Greek sovereign debt is owned by sovereign and public creditors, any decision on debt forgiveness or adjustment would be political in the true sense of the word; and the costs borne largely by taxpayers: one reason why the Germans in particular suffer such angst about how to handle the situation.

This leads to a very awkward dilemma: enforce the terms of existing Greek debt obligations- and run the risk of a Greek default and “Grexit”; or allow substantial debt relief- and risk not only encouraging such requests from other governments subject to “bailouts”, or their far-left and anti-capitalist opponents, but also the siren call of European nationalist and far-right parties, whose rising popularity is already disrupting electoral calculations across much of Europe.

In order to service and repay its obligations at par, Greece would have to run primary budget surpluses for the foreseeable future, and still run the risk of existing debt not being repaid in anyone’s lifetime! This would seem to be untenable on any realistic assessment. So, in our opinion, the most probable outcome is a re-opening of negotiations between Greece and its public creditors, because such a negotiation, if carried out rationally, is likely to result in a compromise that, while politically awkward, will nevertheless avoid the far more negative consequences of an outright refusal to negotiate; namely, a Greek default and exit from the Euro, and potentially the European Union. Such outcomes are almost certainly far worse than the alternatives. The rising turmoil within Greece’s surviving banks may well lead to a resolution being needed somewhat sooner than expected immediately after the elections.

At Awbury, we care about and carefully monitor such matters because their consequences need to be factored into our own assessments of probabilities and risks, when helping our clients manage their own complex and strategic economic and financial risks. Greece may be an “economic rounding error” on a European and global scale, but how events there play out in the coming weeks and months matter far beyond the Acropolis.

– The Awbury Team

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