By Gary Jenkins, Chief Credit Strategist at LNG Capital
On Friday night it was announced that Greece had secured a four month extension to its bailout and thus the headlines screamed that a Grexit had been averted and that the Eurozone was saved. Well, maybe.
First of all the Greek government has to present a list of reform measures, based on the current arrangement, by the end of today. Even for the eurozone, which has had a lot of practice at the matter, kicking the can all the way from Friday to Monday isn’t exactly a Ronaldo like effort…
However considering all the pain that the various parties have gone through to even get to this stage I am going to assume for the purposes of this note that they will manage to come to some kind of agreement that allows the full four month extension to be invoked. Not that I would be buying bonds today based upon that assumption – may as well wait for tomorrow considering the short term risk / reward. This extension is not a done deal yet.
The interim agreement was not really a victory for anyone. At some stage the Greek debt pile will need restructuring, whether that be amended to include bonds linked to growth or the maturities extended further or even a real actual write down as there is very little chance of Greece repaying its debt as things currently stand. In 2011 I said that a 65% write down was required to give Greece a fighting change. Even after the private debt restructuring that percentage is probably still not far from what is required. One wonders if some of the Eurozone finance ministers now wish they had been slightly more proactive 6 months ago and offered the then Greek PM Mr Samaras an amendment to lower the primary surplus target.
We wrote recently that the party that would have to make the most compromises to get a deal done would be the Greek government and that was how it turned out. Where we saw some flexibility from the troika was with the primary surplus target and they have indeed indicated a willingness to amend the 2015 figure. However whilst it was the Greek government who gave ground on this occasion it is likely that the troika will have to be the ones who demonstrate more flexibility over the next four months if they want to keep Greece afloat. Greece has little left to give and any more concessions in entering a new deal may be difficult for the parliament to swallow.
Just as a reminder Mr Tsipras ran an election campaign based upon (amongst other things) the following objectives – and these were restated after the election victory:
1) End of the bailout programme
2) End of the troika
3) End of austerity
4) Write down of the debt
What they have achieved at this stage is an agreement to reconsider the austerity measures.
They have requested an extension of the current programme and agreed to adhere to it.
They will still be monitored by the troika (even though they will now be known Prince like as ‘the institutions formerly known as the troika’).
There is no debt reduction.
The only point on which they have made any progress is that it has been agreed that the primary surplus target may be reduced, or at least that the economic circumstances will be taken into account. So that might be a lower level of austerity rather than an end to it. Whilst this is good news for Greece it might well be that the events of the last month or so have a negative impact upon economic activity. So it might end up being a rather hollow victory.
The events of the last month or so suggest that the Greek governments challenge is to regain trust in the eurozone and to maintain it at home. That will not be easy. Indeed getting parliamentary agreement in Greece going forward may not be stress free. Although power can be an addictive drug and it is unlikely therefore that the new Greek coalition will give up that which has been so recently obtained just yet, so they should at least obtain a grace period to negotiate over the next few months.
However the new Greek PM and FM have achieved one important objective; they are still in the game. They now have four months to try and demonstrate that they have an action plan which is acceptable to their European partners and to their own people. The pressure is now on them and they are not in a great starting position. For example it has been suggested that if a deal had not been reached on Friday night that there may well have been runs on the major Greek banks. Well, if you had recently moved your money away from a Greek bank would you now move it back based upon a four month agreement?
So the Greek government has won some time, but not very much. It is not inconceivable that we are all back here in four month’s time with a heightened risk of either a Greek exit or default or both.
However in the meantime and with the proviso that they reach an agreement today, the likelihood is that the market will forget about Greece for a while and instead focus on a slightly improving European economic outlook coupled with the upcoming QE programme. Taken together it is difficult to believe that the next few months will be anything other than positive for corporate bonds as investors continue to search for yield. However it might be worth setting a diary date for three months hence to prepare for the next round of Greek negotiations.