According to analysts from Brown Brother Harriman, what is taking place in Italy and other geopolitical events, are overshadowing what is going on with Greece with the conclusion of the third assistance program.
Key Quotes:
“The end like the beginning is a bit rolling, in the sense that the formal program ends this month, but the final payment is expected in August. And even, then, it will likely come under close scrutiny to ensure that it does not backtrack on the reforms.”
“Even at this late date, the pivotal issue of the sustainability of Greece’s debt has not been resolved.”
“As is well appreciated now, the bulk of the funds Greece got during its three aid programs allowed Greece to service its debt, the vast majority of which is in official hands. When the private sector was forced to take a haircut on Greek debt, the official sector did not. This is where the fundamental flaw lies. The debt restructuring was not permitted to be sufficient to put Greece on stable footing.”
“The ECB and the Greek Central Bank want something like a precautionary line of credit when the official program ends, but the Greek government sees it as too close to a fourth aid program. Politically it is not acceptable, though somehow projecting a primary budget surplus of 5.2% of GDP will be tolerable in fact. The Greek government prefers a cash buffer of around 20 bln euros for the next 18-24 months, but it is not clear how that can be built. It is almost 10% of GDP.”
“By many measures, the Greek economy has turned a corner. Growth in Q1 was 2.3% at an annualized rate, the best in a decade, and the fifth consecutive quarter of growth (…) More troubling was the 8.3% decline in fixed capital investment, which may reflect the lack of long-term conviction.”
“If one thinks that redenomination risk is minimal, are Greek 10-year bonds, presently yielding 4.5% attractive? We suspect that yields are going to trend higher and would not be surprised to see something closer to 6% over the next 12-18 months.”
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