After more than 16 hours of discussion, an agreement was finally reached in Brussels this morning to provide Greece with a third bailout deal in a bid to keep the beleaguered nation in the eurozone.
Europe’s longest-ever summit has resulted in Greek prime minister Alexis Tsipras making a swift U-turn on his anti-austerity campaign and instead implementing spending cuts and tough reforms, which will have to be passed by Wednesday.
The deal also involves debt restructuring, bridging finance to prevent the Greek banking system from collapsing and up to €50bn of Greek state assets being transferred to a fund that will contribute to recapitalising banks.
Despite the news being widely taken as positive, FxPro chief economist Simon Smith warns that the situation is far from being resolved.
Performance of indices in 2015
Source: FE Analytics
“Greece has been ‘saved’ by a deal, which requires reform measures to be passed mid-week by the Greek parliament (Finland and Germany must also pass in their parliaments). And never forget, a deal that is reached after months of negotiations with literally hours to spare before a Grexit cannot be a good deal,” he said.
“On the face of it, Greece is the one that has blinked because the deal does not give any guarantees with regards to the restructuring of Greek debt. The statement says that ‘nominal haircuts on the debt cannot be undertaken’ and that they remain ready to consider ‘possible additional measures aiming at ensuring that gross financing needs remain at a sustainable level’. It’s unthinkable that this deal would have been reached with Varoufakis still as finance minister, given the concessions made and lack of debt restructuring.”
What’s more, Smith argues that Greece was simply kept in a monetary union that it should never have been admitted into in the first place, saying it was “fanciful” to expect Greece to achieve a target debt-to-GDP ratio of 120 per cent by 2020 back in 2012, during the initial restructuring of Greek debt.
He observes that the International Monetary Fund (IMF) has remained at arm’s length from the situation and puts this down to the fact that lending to a nation state has never solved a sovereign crisis historically. What’s even less reassuring, he says, is that Greece’s debt has not been put onto a “stable footing” through currency devaluation and default.
“Without mentioning cans and roads, today’s deal does kick the underlying issues further into the future and at some point, they will have to be addressed,” Smith said.
“The primary one is the sustainability of Greek debt. The wider one is that of operating a single currency with no real degree of fiscal coordination.”
Azad Zangana, senior European economist and strategist at Schroders, also believes that there is a long path to tread before a resolution to the Greek crisis is found.
However, assuming that Greece is able to swallow its pride, he says that the implementation of a third bailout programme will be positive.
“The roadmap for a Greek deal reduces the probability of Greece exiting the eurozone from 75 per cent to about 30 per cent – this remains high because of the serious hurdles that they must be overcome,” Zangana explained.
“First, the Greek parliament has to approve and implement the pre-bailout conditions in a very short space of time. Parliamentarians are likely to protest against the nature in which they are being forced to legislate. There have already been street protests, angry that Tsipras has gone against the mandate from the recent referendum. His political future must surely be in jeopardy.”
“Second, the agreement must be ratified by a number of parliaments in member states, including Germany. Germany’s hard-line stance has not only won support from the usual suspects (Netherlands, Finland, Slovakia) but also two less vocal members, Spain and Portugal. There is a risk that Europe is split on this issue, and a bailout is not provided.”
Despite these potential headwinds, the economist notes that the Rubicon was crossed by Germany when finance minister Wolfgang Schäuble created a Grexit plan in case negotiations failed.
“This must now crystallise the risk of a country leaving the euro if they do not adhere to the rules of the monetary union - investors will take note and demand adequate compensation from riskier member states,” he warned.
The firm stance taken by eurozone leaders and the European Central Bank over recent weeks has hit some fundamental points home to the Greek government, according to JP Morgan’s David Kelly, who admits that the agreement will cause angst among Greek citizens.
However, he adds that, finally, Greece appears to have realised that it was on the brink of an economic and humanitarian disaster and that the rest of Europe are backing tougher measures for it, regardless of whether the country had accepted the proposal of its creditors last week or not.
“Despite assurances that Europe wanted Greece to stay in the euro, [Greece has realised] European leaders weren’t bluffing and recognized that the economic fallout from a ‘Grexit’ could be contained. This meant that Syriza had essentially no bargaining power. For investors, it is this third point that is probably the most important,” Kelly said.
“There will likely be further bumps in the road as Greece tries to swallow this bitter medicine. However, regardless of the ultimate Greek outcome, the European economy should remain on track and global financial institutions look secure.”
Throughout the crisis, many financial experts have argued that the Greek crisis has caused unnecessary panic among investors, seeing as the country only makes up around 3 per cent of the eurozone’s GDP.
However, M&G Investment’s Jim Leaviss says this morning’s deal should not be undermined and will hopefully improve the stability of capital markets across the globe. He argued that this is particularly important when considering the growth slowdown the global economy has experienced recently.
Performance of indices in 2015
Source: FE Analytics
“[The bailout deal] helps reduce the risk that we once again fail to reach escape velocity from the great financial crisis – [but] we must not take Greek domestic approval for granted,” he argued.
“After all this deal goes against much of what Tsipras's own party believes in, and against what the population overwhelmingly agreed to in the recent referendum. However, it feels likely that we will see the current crisis come to an end, especially if politicians continue to emphasise the growth friendly element of the deal.”
Despite the positivity of the deal, Leaviss warns that the Greek crisis has shown reform of Europe is needed to prevent other eurozone members following suit.
If similar deals must be struck in the future and the Greek bailout deal is perceived as generous, the head of fixed retail interest says that Podemos in Spain, among other left-wing political parties in the eurozone, may also fight for debt relief.
Of course, with larger economies, this would have a more significant impact on the economy globally.
“Today's compromise looks as good as it could have been for all involved – there was no win-win solution available," Leaviss added.
