By Derry Pickford
After Greece reached an interim extension with the Eurogroup at the end of February, Alexis Tspiras, Greece’s prime minister, declared that Greece had won the battle but not yet won the war. However, the opposite would have been a fairer assessment.
Greece has won very few concessions. Some are purely cosmetic – the Troika, a toxic concept to the Greek electorate, is now referred to as the “three institutions”.
More substantively, the primary surplus target for 2015 “will take economic circumstances into account”. An acknowledgement of the economic reality that Greece won’t achieve its previous 3% target because of a shortfall in fiscal revenues cannot really be seen as a big concession. In return Greece has agreed to “refrain from any rollback of measures and unilateral changes to the policies and structural reforms”. In other words the Troika’s programme remains intact.
So how much time has the agreement bought? Often the answer given is four months: the length of time of the extension. However, by the end of April new targets will have to be agreed, and although at the moment the news has quietened down, agreeing those targets could create significant tensions. One obstacle will be holding the current Greek coalition together. After the deal was announced a prominent Syriza MEP apologised to the Greek people for the “illusion” of an improved deal. Their right wing coalition partner has little incentive to remain, particularly as the chance of new elections later in the year rises and they risk being outflanked by the extreme right-wing party, Golden Dawn. Finally, maintaining confidence that Greece will remain in the euro will be essential. If capital flight continues at the pace it has done, the ECB may judge that access to ELA funding is not sustainable.
Although there are risks, we still expect that a deal will be done. Greece will get more fiscal flexibility in return for honouring its debts and it will remain part of the eurozone. We put the likelihood of a Greece exit from the EMU in the next two years at about 25%. However, should this happen, we believe the consequences for financial markets will not be nearly as severe as if this event had occurred in 2012. Exposure to Greek financial assets by foreign banks is down according to BIS figures to below €65bn (from nearly €300bn in 2010). The strong firewalls that have been put in place over the last couple of years (including the €450bn European Stability Mechanism, and unlimited long-term repos for banks) mean that the risks of contagion are much lower than they have been. If Greece was to leave we also believe there would be further measures to increase confidence in other country’s membership being maintained. We therefore believe that despite the risks, European assets, on a currency hedged basis, remain very attractive to investors.
Derry Pickford is a macro analyst at Ashburton International
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