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Aon Retirement and Investment Blog

The Greek Crisis Rolls On

Since Monday we have been asked a fair number of times what we think of the ‘deal’ that was agreed between Greece and the EU last weekend.  We have held back from issuing an update so far because the shape of what has been agreed to is still very unclear.  Only a few of the reforms widely recognized as necessary were approved by the Greek parliament last night (value-added tax/corporation tax/raising the retirement age/and a luxury tax) with additional reforms on the table. 
What is far less clear is what the EU creditors are offering. There is a big and very vague headline number of €82-€86bn of new money potentially on offer, but we do not know much more.  We do not know specifics on the timing of the offer or what conditions it would entail. Perhaps more importantly, we have no idea whether debt restructuring or relief (terminology is less important than a recognition of Greece’s inability to pay in full) is on offer now, later, or not at all.  The position may become a bit clearer over the next few weeks once more detailed talks begin on the programme, and then we can offer a clearer assessment. 
The following bullets summarize our firm’s initial thoughts on the developing Greek bailout, based on currently available information – it should be noted that significant details still have yet to emerge, and we will not be able to issue more concrete views until there is more clarity.

  • Greece has been put in quarantine in the nick of time before next Monday’s big deadline.  A failure to pay the European Central Bank (‘ECB’) some €3.5bn due on that date would have put Greece firmly on the path of an exit from the euro.   Of course, as a more senior creditor, the International Monetary Fund’s (‘IMF’) arrears of almost the same amount have to be cleared before the ECB’s can be,  and the focus over the next 48 hours will be to make sure that both can be honoured by Monday.
  • The immediate threat of a Greek exit from the euro is temporarily allayed, and with it the risk of a volatility shock to markets.  However, this is clearly not a resolution of the Greek crisis but a containment exercise.   The negotiating stances from certain influential EU members indicate that this plan is far less about Greece than it is about safeguarding what remains of the cohesion in the single currency area.  However, it is the lack of cohesion that has been exposed.  As a result, if the crisis rolls front of stage again and the rescue programme fails, damage to the markets potentially could be more serious than if Greece had exited the euro now. That is of course for another day rather than an imminent threat.
  • What concentrated EU minds last weekend was not a belief that Greece should remain in the euro, but that, if it left, a destabilising confidence shock to the single currency project would set back the fragile economic recovery that has begun on the back of a QE-weakened euro.  To give credit to the German position, there was some transparency in the view explicitly expressed by the German Finance Minister that Greece should consider leaving the euro.  France and Italy’s opposition to a Greek exit and support of a 3rd rescue programme were seen as driven almost entirely by a fear of instability.
  • In an economy that has shrunk by a quarter since the first stability programme began in 2010 and which has been hit by the further shock to confidence and the banking freeze in recent weeks, more austerity will likely not sit easily with the Greek public, or be rewarded with higher tax revenues.  Some of the austerity measures proposed could possibly end up deepening the economic slide.  The shape of the fiscal targets Greece will have to meet to win new money is not known, but it will not be easy to deliver any public finance improvement for quite some time.
  • The other difficulty is with the planned privatisation programme.  This will supposedly raise €50bn, a portion of which will be ploughed back into the economy as a ‘stimulus’ and a part of which will be earmarked for the recapitalisation needed for Greek banks.  The obstacles to realising these sales, the equivalent of about a quarter of Greek GDP, are well known since notional attempts have been made in the past 5 years. To expect the current Greek government to enact privatisation on this scale when previous more market-friendly governments have failed, is ambitious to say the least, even if some of the root and branch reform of the economy that the EU wants does manage to go ahead.
  • Implementation risk on both austerity and privatisation in this third rescue programme are therefore both considerable. We anticipate it being some time before the Greek crisis is considered to have officially concluded.  
  • A key missing ingredient remains the silence on debt restructuring or relief.  The US stance echoed by the IMF that there should be open acknowledgement of Greece’s inability to pay is clear, but political imperatives, especially in Germany, have worked against this notion.  The markets have moved in a way which indicates that the US and IMF are correct on this point, even if not officially acknowledged by EU politicians answerable to their taxpayers.  
  • Wider implications from this agreement for the EU and the single currency need to be recognised. With the amount of scarce political capital that is being sunk into this third rescue programme, a failure could open a bigger schism and expose more clearly the deep fault-lines that lie with the entire single currency project.  In short, if Greece unravels again, the ability of the Franco-German axis to spin another rescue programme is curtailed.  
  • A big casualty of this embrace between the EU and Greece is a fracturing of the political will towards further integration in the EU.     
Tapan Datta is the head of the Global Asset Allocation team and works out of the London office.

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