Columbia Threadneedle: Von ‘Grexit’ zu ‘Grin’

After a weekend of long and often very bad-tempered discussions within the Eurogroup, the leaders of the eurozone have finally agreed to offer Greece a third bailout, with the European Commission confirming that Greece will benefit from c.€86 billion of financing over the next three years.  

Assuming the steps required in the coming days are met, the immediate bankruptcy of the Greek government has been avoided, and the country will remain within the eurozone. However, the terms of the deal look to be very tough, and the deal will be seen as a humiliation by many Greeks. Given that the ruling Syriza party was elected on an anti-austerity mandate, and that voters rejected a much weaker reform package in the referendum, political upheaval in Greece may now follow. Moreover, there is no debt forgiveness or debt write-offs for Greece, meaning that total Greek debt-to-GDP levels will remain unsustainably high.

The key points of the deal are as follows:

•Greece will receive some €86bn in bailout funds. 

•Before legal negotiations can take place, the Greek parliament must approve a range of significant reforms affecting VAT and the tax base, pensions and other areas of the economy. The EU would like the reforms to be approved by the Greek parliament this Wednesday (15 July). This unusual approach is a response to the complete breakdown of trust between the Greek government and their European partners.

•Certain eurozone national parliaments (most pertinently Germany) will then need to give the go ahead before formal negotiations can begin over the specifics of the new bailout programme. This could, in theory, be done by the end of the week, although this may prove to be easier said than done.

•A €50bn asset fund will be created, chiefly to make sure that privatisation commitments are kept. This will be run by Greece but supervised by Europe. Half of this fund will be used to recapitalise the Greek banks.

•The European Stability Mechanism (ESM) will provide an immediate €10bn to recapitalise Greek banks, which are close to collapse.

•A 'haircut' or reduction of Greek debts will not be offered – i.e. there will be no ‘debt forgiveness’ which the German chancellor Angela Merkel has said is ‘out of the question’. Greece’s debts might be restructured to make repayment a little easier (e.g. by extending maturity), but only after Greece has introduced all of its promised reforms.

What happens if the bailout is not approved by the Greek parliament?

Prior to the deal being announced, the Eurogroup had warned Greece that its failure to enact reforms would result in the suspension of Greece’s membership of the euro. In the event of suspension, the exact length of the ‘time out’ was not specified, but comments from the German finance ministry suggest it could have been as long as five years. However, this triggered further tension between the eurozone member states, with France’s President Hollande saying that a temporary exit from the euro area was not an option, and that the issue at stake was not simply whether Greece stayed in or out of the euro but ‘our conception of Europe’. President Hollande was supported by the Italian PM Matteo Renzi, while Germany continued to emphasise its refusal to do a deal ‘at any price’.

Wider implications

The key focus in the short term will surround the navigation of the immediate hurdles (Greek parliamentary approval, then German parliamentary approval) and how long the banking sector can continue to provide cash to Greek citizens while emergency loans from the ECB remain frozen. All of these situations are urgent and any hold-up would increase significantly the risk of a messy Grexit scenario. In the bigger picture, in agreeing to support this bailout process, Alexis Tsipras has effectively reneged on all of his party’s pre-election commitments and handed sovereignty for domestic policy to Europe. This comes at a time when the economic situation is likely to deteriorate further in part thanks to the newly-prescribed austerity that he was so vehemently against. Against this backdrop, while the short-run risks of Grexit have declined, the risk that the Greek population begin to question the merits of euro membership must surely be increasing. 

The implication for markets has been unclear through much of this saga, as investors have found it difficult to assess the direct costs or benefits of the different scenarios. Following months of indecision and reasons to be cautious, it is perhaps unsurprising to see a stark positive reaction to what is a ‘deal’ full of pitfalls and contradictions. The bigger picture message is perhaps for citizens of Europe who might want to re-negotiate the status quo with the establishment. From a position of weakness before, Greece’s economy now lies in tatters once again, facing the prospect of more austerity and outside control. For sure, Tsipras’ management of the situation could be called into question, but any budding protest parties elsewhere will think twice before taking on the elite.