Greek Tragedy

With the subject of Greece dominating most news mediums, I am getting asked ever more for my comments from the increasingly worried. With this in mind, here is some perspective that will hopefully help the nerves.

 

Background

Following the European debt crisis in 2011, some Eurozone countries were given bailout loans, including Greece from the European Central Bank (ECB) and the International Monetary Fund (IMF). Some of these loan repayments are due in June, July and August and Greece doesn’t have the financial means to meet these repayments.

 

As the repayments can’t be met, Greece has been forced to renegotiate different loan terms. The Greek Government wants a new loan on better terms to repay their existing loans (why wouldn’t they!). While the ECB and IMF are willing to consider this proposal they want Greece to commit to new spending cuts in order to reduce the risk of another problem like this in the future.

 

And that is the crux of the issue……the Greek Government is unwilling to implement public spending cuts (they were elected earlier this year on the back of promising this – the anti-austerity party!).

 

Options / Outcomes

There are 3 main potential options and outcomes:

1. Agree a last minute deal with the ECB / IMF and make public spending cuts in Greece (expect a civil war in Greece with this option)

 

2. No deal is reached and a short term solution is agreed to buy all parties more time so that they can deal with it ‘later’

 

3. Greece defaults on its loan repayments and is forced to leave membership of the Eurozone (Grexit).

 

What Is Likely?

In theory the EU could easily withstand a Greek exit as the country contributes less than 2% of the collective Eurozone economic output……in other words, Greece is quite a small country economically and so this loss would be minimal.

 

Financial markets though are likely to experience short term volatility as the market expectation was that a deal would be reached. A sudden Grexit does not appear to be seriously factored into the markets yet.

 

The bigger potential problem is ‘contagion’. The remaining European leaders will secretly want Greece to publicly experience problems if they leave the Eurozone. If this doesn’t happen and Greece faces no issues after leaving there is a risk that other indebted countries (such as Italy) could elect an anti-austerity Government, default on loan repayments, leave the EU and be better off. While the EU could withstand Greece leaving it is less able to withstand multiple countries leaving and defaulting on its loan repayments.

 

Of course Greece does not have to leave the Eurozone but it will almost certainly have to make concessions from its current negotiation stance. The next few days and weeks will be vital in determining the future face of Greece and the European Union.

 

So there you have it……a little clarity amongst the confusion.